As filed with the Securities and Exchange Commission on November 13, 2000
Registration No. 333-45548
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------------------
AMENDMENT NO. 1 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------------------
LUMENON INNOVATIVE LIGHTWAVE TECHNOLOGY, INC.
(Exact name of Registrant as specified in its charter)
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<CAPTION>
<S> <C> <C>
Delaware 3220 98-0213257
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
8851 Trans-Canada Highway
Ville Saint-Laurent, (QC) Canada H4S 1Z6
(514) 331-3738
(Address, including zip code, and telephone number, including area code,
of Registrant's principal executive offices)
S. Iraj Najafi
Chief Executive Officer
Lumenon Innovative Lightwave Technology, Inc.
8851 Trans-Canada Highway
Ville Saint-Laurent, (QC) Canada H4S 1Z6
(514) 331-3738
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
---------------------
Copy to:
David J. Adler, Esq.
Olshan Grundman Frome Rosenzweig & Wolosky LLP
505 Park Avenue
New York, New York 10022
(212) 753-7200
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Approximate date of commencement of proposed sale to the public:
From time to time after the effective date of this Registration Statement.
---------------------
If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box. |X|
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, please check the
following box and list the Securities Act of 1933 registration statement number
of the earlier effective registration statement for the same offering. |_|
If this form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act of 1933, check the following box and list the
Securities Act of 1933 registration statement number of the earlier effective
registration statement for the same offering. |_|
<PAGE>
If this form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act of 1933, check the following box and list the
Securities Act of 1933 registration statement number of the earlier effective
registration statement for the same offering. |_|
If delivery of the Prospectus is expected to be made pursuant to Rule
434, check the following box. |_|
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Proposed Proposed
Maximum Maximum Amount of
Title of Each Class of Securities Amount to be Offering Price Aggregate Registration
to Be Registered Registered Per Share Offering Price Fee
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Common stock, $.001 par value 2,000,000 $21.625(1) $43,250,000(1) $11,418.00
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Shares of common stock issuable
upon exercise of outstanding
warrants and upon conversion of
outstanding convertible notes(2) 8,800,000(3) $21.625(2) $190,300,000(2) $50,239.20
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Total Registration Fee ------ ----- $233,550,000 $61,657.20(1)
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(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(c) under the Securities Act of 1933, as amended, based on the
average of the high and low prices of the common stock as reported on the
Nasdaq National Market on September 6, 2000. The registration fee was
previously paid.
(2) The outstanding warrants and notes were issued in connection with a
private placement financing. The warrants are exercisable at an exercise
price based upon the volume weighted average price of the common stock
during the five consecutive trading days preceding vesting. The warrants
vest in January 2002. The convertible notes are convertible, at the option
of the holder, after the issue date, at a conversion price equal to the
average of the closing bid price of the common stock ^ for the five
consecutive trading days ending immediately prior to conversion, but in no
event less than $7.00 per share and no more than $25.00 per share. The
price set forth in the table has been determined solely for purposes of
calculating the registration fee pursuant to Rule 457(c) under the
Securities Act of 1933, as amended, based on the average of the high and
low prices of the common stock as reported on the Nasdaq National Market
on September 6, 2000.
(3) In addition to the shares of common stock set forth in the calculation of
Registration Fee Table, which includes a good faith estimate of the number
of shares of common stock underlying the warrants and convertible notes,
pursuant to Rule 416 of the Securities Act of 1933, as amended, this
registration statement also registers ^ the additional ^ shares of common
stock as may become issuable as a result of stock splits, stock dividends
or similar transactions.
THE REGISTRANT AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION
8(A), MAY DETERMINE.
<PAGE>
SUBJECT TO COMPLETION, PRELIMINARY PROSPECTUS DATED NOVEMBER 13, 2000
PROSPECTUS
LUMENON INNOVATIVE LIGHTWAVE TECHNOLOGY, INC.
10,800,000 SHARES OF COMMON STOCK
The selling stockholders listed in this prospectus are offering and
selling up to 10,800,000 shares of our common stock. We will not receive any
proceeds from the sale of these shares. We could receive proceeds of up to
$50,008,000, if warrants were exercised at their minimum exercise price, and
proceeds of up to $150,024,000, if warrants were exercised at their maximum
exercise price, from the exercise of warrants issued to the selling stockholders
as part of the financing described under "Business-Material Agreements -
Convertible Note Financing."
Our common stock is traded on The Nasdaq National Market under the
symbol "LUMM." The last reported sale price for our common stock on The Nasdaq
National Market on ^ November 8, 2000 was $11.38 per share. The selling
stockholders may offer their shares of common stock from time to time, in the
open market, on The Nasdaq National Market, in privately negotiated
transactions, in an underwritten offering, or a combination of ^ methods, at
market prices prevailing at the time of sale, at prices related to such
prevailing market prices or at negotiated prices. The selling stockholders may
engage brokers or dealers who may receive commissions or discounts from the
selling stockholders. Any broker-dealer acquiring the common stock from the
selling stockholders may sell these securities in normal market making
activities, through other brokers on a principal or agency basis, in negotiated
transactions, to its customers or through a combination of ^ methods. See "Plan
of Distribution." We will bear all of the expenses and fees incurred in
registering the shares offered by this prospectus. The selling stockholders will
pay any brokerage commissions and discounts attributable to the sale of the
shares.
INVESTING IN THE COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. PLEASE
SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR A DISCUSSION OF THE RISKS ASSOCIATED
WITH OUR BUSINESS.
Neither the Securities and Exchange Commission or any other regulatory
body has approved or disproved of these securities or passed on the accuracy or
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
Commissions received by the selling stockholders or any broker-dealers,
agents or underwriters that help distribute the shares and any profit on the
resale of the shares purchased by them may be considered underwriting
commissions or discounts under the Securities Act of 1933.
The date of this prospectus is ____________, 2000
<PAGE>
TABLE OF CONTENTS
Page
Prospectus Summary.................................3
Risk Factors.......................................8
Forward-Looking Statements........................12
Use of Proceeds...................................13
Dividend Policy...................................13
Market Price of the Registrant's Common Equity
and Related Stockholder Matters................13
Selected Financial Data...........................15
Management's Discussion and Analysis
of Financial Condition and Results
of Operations..................................17
Business..........................................20
Management........................................33
Security Ownership of Certain Beneficial
Owners and Management..........................38
Certain Relationships and Related Transactions....40
Selling Stockholders..............................40
Description of Capital Stock......................42
Indemnification of Directors and Officers.........43
Where You Can Find More Information...............44
Quantitative and Qualitative Disclosures
About Market Risk..............................44
Plan of Distribution..............................44
Legal Matters.....................................46
Experts...........................................46
Index to Financial Statements and Exhibits F-1
[INSIDE COVER OF PROSPECTUS]
<PAGE>
PROSPECTUS SUMMARY
AS USED IN THIS PROSPECTUS, UNLESS THE CONTEXT OTHERWISE REQUIRES, THE
TERMS "WE" OR "US" MEAN LUMENON INNOVATIVE LIGHTWAVE TECHNOLOGY, INC.
("LUMENON"). THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS
PROSPECTUS. YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY.
LUMENON
We are a development stage company. We design and develop products
related to the Dense Wavelength Division Multiplexing (DWDM) market and other
optical or photonic segments of the telecommunications market. DWDM is a
technology that permits a user to send multiple sources of information and data
to be sent at the same time over a single optic fiber. DWDM allows network
operators to remove an entire class of equipment in their networks. We are
developing and manufacturing devices for use in the DWDM market under a teaming
agreement with Molex Incorporated. We do not expect to generate product revenues
until 2001. We had accumulated net losses of CDN $224,599,174 (US$151,899,888)
as of June 30, 2000.
Our plan of operations for fiscal year 2001 is to finalize the
development of our DWDM devices and to bring them to market. We will focus
product development on four aspects:
o perfecting manufacturing steps for DWDM devices;
o readying automation equipment in our new manufacturing facility;
o setting quality control criteria for our operations; and
o expanding our packaging and pigtailing capability for our optical
chips.
We have begun producing and testing a limited number of product devices
and intend to market 4, 8, 16, 32 and 40 channel DWDM chips. In addition, we
intend to offer services based on our capability to design new customized DWDM
devices according to specific client needs.
Service providers like AT&T and MCI WorldCom are creating fiber optic
networks to transmit large quantities of data at high speeds. They must meet
demand for uses such as the Internet, e-mail, and electronic commerce. Service
providers desire to increase the capacity of their networks without installing
new fiber optic cable. DWDM products allow them to greatly increase their
information carrying capacity on existing fiber. We believe that there is a
substantial market for our devices in DWDM systems.
We make our devices in the form of an "optical chip" on silicon through
a patented sol-gel process. To our knowledge, there are no other manufacturers
of DWDM devices on silicon using a sol-gel manufacturing process. The advantages
of our process include:
o lower capital investment;
o less manual labor required in the assembly process;
o fewer process steps, reducing the likelihood of manufacturing
defects; and
o the cost of an optical chip does not increase proportional by with
the number of channels on the chip.
We acquired our initial rights to our patented manufacturing process
under a license agreement with Polyvalor and McGill University. Through our
research and development, we have evolved the process. We have filed two patent
applications relating to this process. Our only material obligation to the
licensors is to pay royalties on our sales, subject to a cumulative maximum of
CDN$3,500,000 (US$2,367,104). See "Business - Material Agreements - Agreement
with Polyvalor and McGill University."
We have entered into an agreement with Polaroid Corporation for the
license of patents held by Polaroid in connection with array wave-guide gratings
(AWG). We agreed to pay to Polaroid an initial licensing fee of CDN$584,074 (US
$395,000). In addition, we will pay royalties on the net selling price of our
products, at an annual rate of 5% for aggregate net selling prices of
US$5,000,000, 3.5% for aggregate net selling prices over five and up to US$40
million, and 1.75% for aggregate net selling prices over US$40 million, for each
year of the agreement. See "Business - Material Agreements - Agreement with
Polaroid."
3
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We have entered into agreements with Molex that contain restrictions on
our ability to sell our products. Under a teaming agreement, we agreed with
Molex to jointly develop DWDM products. Subject to our testing and proving our
technology and our ability to manufacture and deliver the devices, Molex is
committed to purchase our entire DWDM production for the first 12 months of
production, up to 400 units per month. Molex also has the option to buy 50% of
our remaining chip production. After the first 12-month period, Molex will have
the option to purchase 50% of our DWDM production for the succeeding three-year
period. Any product sold by us to Molex will be priced at our gross cost. In
addition, Molex will pay to us 30% of the profits obtained on final products
built from the chips supplied, 50% of the profits from sales of functionally
unmodified packaged products and 30% of the profits from sales of other final
products. We are free to package and sell any remaining products, with all
profits going to us. However, we cannot sell unpackaged chips for
telecommunications applications, except for special order or exploratory
purposes, without written agreement from Molex. If we are unable to supply Molex
on a timely basis with a commercially reasonable quantity of the devices or in
the event we experience a change of control, Molex has the non-exclusive right
to manufacture all components of the devices in return for a royalty equal to
50% of the profits from sales of functionally unmodified packaged products and
30% of the profits from sales of other final products. See "Material Agreements
- Agreements with Molex" for a detailed description of our agreements with
Molex.
We are incorporated under the laws of the State of Delaware. Our
principal executive offices are located at 8851 Trans-Canada Highway, Ville
Saint-Laurent, (QC) Canada H4S 1Z6, and our telephone number at that address is
(514) 331-3738.
THE OFFERING
Common stock offered by the selling
stockholders................................ 10,800,000 shares, of which
2,616,414 have been issued and
8,183,586 are issuable upon
exercise of outstanding warrants
and conversion of outstanding
convertible notes.(1)
Common stock outstanding.................... 36,069,153 shares(2)
Common stock to be outstanding after
the offering................................ 44,252,739
Use of proceeds............................. We will not receive any proceeds
from the sale of the shares of
common stock by the selling
stockholders. We could receive
proceeds of up to $50,008,000, if
warrants held by the selling
stockholders were exercised at
their minimum exercise price, and
proceeds of up to US$150,024,000 if
warrants held by the selling
stockholders were exercised at
their maximum exercise price. Given
the uncertainty as to any exercise,
the timing of any exercise and the
amount that we would receive, we
have not established any specific
use for these proceeds. They will
be used for working capital and
general corporate purposes
Risk factors................................ An investment in the common stock
offered by the selling stockholders
involves a high degree of risk. See
"Risk Factors" beginning on page 8.
Nasdaq National Market symbol............... LUMM
(1) Represents approximately 18.49% of the outstanding shares of our common
stock assuming the issuance of the 8,183,586 shares to be issued. On
July 25, 2000, we sold CDN$51,243,000 (US$35,000,000) aggregate
principal amount of convertible notes due July 25, 2005 to two
institutional investors. The notes bear interest at rate of 7 1/2% per
annum, which is payable upon the earlier to occur of the repayment or
conversion of the notes. The notes are convertible into shares of common
stock at a price equal to the average of the closing bid prices of our
common stock for the five consecutive trading days
4
<PAGE>
ending immediately prior to conversion, but in no event less than
US$7.00 nor more than US$25.00 per share (unless a default under the
notes has occurred). On October 16, 2000, notes for an aggregate
principal amount of CDN$10,549,000 (US$7,000,000), together with
accrued interest, were converted into 616,414 shares of common stock at
a price equal to US$11.55.
In connection with the financing, we issued to the purchasers five year
warrants to purchase an aggregate of 5,000,800 shares of common stock,
vesting 18 months after issuance, at an exercise price based upon the
volume weighted average price of the common stock during the five
consecutive trading days preceding vesting. If the volume weighted
average price is equal to or less than US$30.00, then the exercise price
will be US$10.00. If the volume weighted average price is greater than
US$30.00, but less than US$70.00, then the exercise price will be the
sum of US$10.00, plus one-half of the excess over US$30.00. If the
volume weighted average price is more than US$70.00, then the exercise
price will be US$30.00. The number of shares of common stock issuable
upon exercise of the warrants and the exercise price of the warrants are
subject to adjustment upon the occurrence of the issuance of convertible
securities at a conversion/exercise price that is less than the then
current market price, stock splits, stock dividends and other
recapitalizations. In addition, upon a consolidation, merger or sale in
which we are not the surviving entity, we must require that our
successor assume our obligations under the warrants. If we declare or
make any distribution of assets or rights to acquire shares to our
stockholders, the holders of the warrants, upon exercise thereof, will
be entitled to receive the amount of such assets or rights as if such
holders had been holders of common stock on the date of such
distribution. In the event of a default under the notes or in others of
our obligations to the purchasers, vesting of the warrants may be
accelerated. See the Risk Factor entitled "We have a significant number
of outstanding warrants and options, which could adversely affect the
price of our common stock and our ability to sell additional common
stock" on page 11 and Selling Stockholder table on page 41.
(2) Does not include
o 5,112,650 shares of common stock reserved for issuance upon
exercise of options granted or to be granted under our stock
option incentive plan, under which options to purchase 3,590,150
shares of common stock are outstanding;
o 5,757,811 shares of common stock reserved for issuance upon
exercise of outstanding common stock purchase warrants; or
o 4,383,586 shares of common stock reserved for issuance upon
conversion of outstanding convertible notes.
Except as otherwise indicated, all references in this prospectus to the
number of shares of common stock outstanding do not include the foregoing
shares.
5
<PAGE>
SUMMARY FINANCIAL INFORMATION
The following summary financial information is taken from our financial
statements included elsewhere in this prospectus. The summary financial
statements should be read in conjunction with the financial statements and
related notes , and "Management's Discussion and Analysis of Financial Condition
and Results of Operations." Our financial statements as of and for the fiscal
years ended June 30, 2000, June 30, 1999 and December 31, 1998 have been audited
by KPMG LLP, Montreal, Canada, independent certified public accountants. Unless
otherwise indicated, all dollar amounts in this prospectus are expressed in
United States dollars. We changed our fiscal year end to June 30, effective in
1999. The amounts reported below for fiscal year 1999 are for the six-month
period ended June 30, 1999.
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DECEMBER 31, JUNE 30,
1998 JUNE 30, 1999 2000 JUNE 30, 2000
---- ------------- ---- -------------
(IN CANADIAN DOLLARS) (IN U.S. DOLLARS)
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Current Assets $552,912 $2,044,584 $6,058,929 $4,097,745
Capital Assets - 1,492,495 4,602,682 3,112,865
Total Assets 553,155 3,547,080 12,199,898 8,250,978
Liabilities 119,349 1,002,582 1,885,401 1,275,125
Stockholders' 433,806 2,544,498 10,314,497 6,975,853
Equity
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FROM INCEPTION SIX MONTHS FISCAL YEAR FISCAL YEAR
TO DECEMBER 31, ENDED ENDED ENDED
--------------- ----- ----- -----
(IN CANADIAN DOLLARS) (IN U.S. DOLLARS)
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Research and
Development
Expenditures (1) $12,291 $162,370 $218,968,358 $148,091,681
General and
Administrative (2) 290,435 569,507 4,913,579 3,323,130
Other Income
(Loss) 15,217 (17,674) 319,823 216,301
Net Loss 287509 749,551 223,562,114 151,198,510
Loss Per Share (3) $0.02 $0.04 $8.80 $5.95
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(1) Amounts shown are net of tax credits and grants and include non-cash
expenses resulting from the issuance of common stock upon exercise of
the Molex services warrant.
(2) Includes depreciation of CDN$893,620 (US$604,369) for the year ended
June 30, 2000 and none before.
(3) As of December 31, 1998, June 30, 1999 and June 30, 2000, the weighted
average number of shares outstanding were 14,972,188, 17,480,767 and
25,415,601, respectively. We have never paid dividends on our common
stock.
6
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At June 30, 2000, the exchange rate between the Canadian dollar and the
U.S. dollar was CDN$1.4786 to US$1.00, based on the rate as of each date issued
by the Bank of Canada.
7
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RISK FACTORS
An investment in our common stock is highly speculative and involves a
high degree of risk. You should only consider investing in our common stock if
you are able to afford to lose your entire investment. In evaluating our
business, you should carefully consider the following risk factors in addition
to the other information included in this prospectus
WE ARE A DEVELOPMENT STAGE COMPANY WITH NO EXPERIENCE IN MANUFACTURING AND
MARKETING OUR PRODUCTS.
We have no history in manufacturing and marketing our products. We are a
development stage company and, to date, have not had any revenues from sales of
our products. Our operating history provides no basis for evaluating us and our
prospects. We must successfully develop and commercialize our products, meet
competition, attract, retain and motivate qualified employees, expand our
operations and market and sell products using our licensed proprietary
technology in volume to have significant revenues and to be profitable.
Our future will depend on our ability to develop, manufacture and
commercialize products based upon our licensed proprietary technologies. Our
first product, the DWDM optical chip, has only recently entered production in
limited quantities and we expect to make only limited shipments of prototype
chips in 2000. See "Business - Plan of Operations" beginning on page 21.
Potential customers may not accept our products, they may be difficult to
produce in large volumes at an acceptable cost, fail to perform as expected,
cost too much or be barred from production by the proprietary rights of others.
We expect to spend considerable sums to develop and market our new
products. We expect our operating expenses to increase as we develop our
technology and products, increase our sales and marketing activities and expand
our assembly operations. We will not have revenues from product sales before
2001. The amount that we will lose and when, if ever, we will have profits is
highly uncertain.
WE MAY BE UNABLE TO OBTAIN FUNDING TO MEET OUR FUTURE CAPITAL NEEDS.
We will require substantial additional funding over the next several
years to develop our technology, to broaden and commercialize our products and
to expand assembly capacity. Additional funding could be unavailable on
favorable terms, or at all. We may then have to delay or abandon some or all of
our anticipated spending, cut back our operations significantly, sell assets, or
license to third parties potentially valuable technologies that we currently
plan to commercialize ourselves. Our capital needs will depend on a number of
factors, including:
o How many new products we develop
o How fast we develop and commercialize our products and expand our
assembly operations
o The response of competitors
o The level of acceptance of our products
o Competing technological developments
o Changes in market demand
If we borrow funds, we may become subject to restrictive financial
covenants and our interest obligations will increase. If we issue more stock,
our present stockholders may experience substantial dilution.
THERE ARE SIGNIFICANT RISKS ASSOCIATED WITH THE MANUFACTURE OF OUR PRODUCTS.
We have never assembled large amounts of products. The manufacture of
our chips is a complex, sophisticated process, requiring a clean room and
precision assembly equipment. Very small amounts of contaminants in assembly,
defects in components, difficulties in the assembly process or other factors can
cause a significant number of chips to be nonfunctional or to have unacceptable
defects. This could significantly reduce yields and increase the cost of our
products. Many of these problems are difficult to find and require much time and
expense to fix.
8
<PAGE>
We must effectively transfer production information from our research
and development department to our new manufacturing facility and rapidly achieve
volume production. If we fail to effectively manage this process or if we
experience delays, disruptions or quality control problems in our manufacturing
operations, our shipments of products to our customers could be delayed.
Unforeseen additional capital expenditures could be required to remedy these
problems. See "Business - Plan of Operations" on page 21.
Changes in our manufacturing processes or the inadvertent use of
defective materials could significantly reduce our manufacturing yields and
product reliability. Because most of our manufacturing costs are relatively
fixed, manufacturing yields are critical to our results of operations. Lower
than expected production yields could delay product shipments and reduce our
gross margins. We may not obtain acceptable yields.
WE MAY BE UNABLE TO ADAPT TO RAPID TECHNOLOGICAL CHANGE AND CONTINUE NEW PRODUCT
DEVELOPMENT.
We must become a key supplier of components to the photonics industry to
be successful. The photonic market is highly competitive and marked by rapidly
changing technology . We may be unable to adapt to rapid technological change
and to continue new product development.
We must
o Anticipate what our clients and their end-users will need and demand
in the manufacture of products, both for general industry use and
specific custom-made usage
o Incorporate those anticipated features and functions into our
products
o Meet specific and exacting design requirements
o Price our products competitively
o Introduce our products at the right time to meet market demand
The life cycle of a product we make may be short. We must introduce new
products on a timely basis and we must spend a great deal to develop new
products. We could experience delays in introducing new products, because they
are complex. The success of our new products will depend on many factors,
including
o Proper product definition
o Timely completion and introduction of designs
o Ability of our customers to incorporate our product into theirs
o Quality and performance of our products
o Differentiation of our products from those of our competitors
o Acceptance of our products and those of our customers
OUR AGREEMENTS WITH MOLEX CONTAIN SIGNIFICANT RESTRICTIONS.
We have entered into agreements with Molex that contain restrictions on
our ability to sell our products and grant to Molex preferential rights to
acquire up to 50% of our production at favorable prices. In the event we are
unable to supply Molex on a timely basis with a commercially reasonable quantity
of the devices or in the event we experience a change of control, Molex has the
non-exclusive right to manufacture all components of the devices in return for a
royalty equal to 50% of the profits from sales of functionally unmodified
packaged products and 30% of the profits from sales of other final products. See
"Business - Material Agreements - Agreements with Molex" on page 28 for a
detailed description of our agreements with Molex.
THE SMALL NUMBER OF POTENTIAL CUSTOMERS FOR OUR PRODUCTS WILL GIVE THEM
CONSIDERABLE LEVERAGE OVER US.
For the foreseeable future, we intend to market our products to only a
limited number of leading original equipment manufacturer customers. We will
rely on these customers to develop their own systems, creating demand for our
products. Our customers may be expected to exert considerable leverage in
negotiating purchases from us. The telecommunications equipment industry is
dominated by a small number of large companies with few optical components
suppliers. Existing suppliers could exert pressure to keep out new entrants.
OUR COMPETITION MAY BE ABLE TO MORE EFFECTIVELY DEVELOP AND MARKET THEIR
PRODUCTS, MAKING OURS OBSOLETE.
9
<PAGE>
Our competitors include large companies that have substantially greater
financial, technical, marketing, distribution and other resources, broader
product lines, greater name recognition and longer standing relationships with
customers than we do. Our competitors include both companies already
manufacturing large volumes of products based on established technologies, as
well as companies selling emerging technological solutions. Potential
competitors could also include our own customers, which may decide to
manufacture products competitive with ours, rather than purchasing our products.
WE ARE DEPENDENT ON KEY PERSONNEL; WE MAY NOT BE ABLE TO ATTRACT, TRAIN AND
RETAIN SUFFICIENTLY QUALIFIED PERSONNEL.
Our success will depend to a significant degree upon the continued
services of key management, technical, and scientific personnel, including Dr.
S. Iraj Najafi, our President and Chief Executive Officer, Dr. Mark Andrews, our
Chief Technical Officer, and Dr. Chia-Yen Li, our Chief Operating Officer. We do
not currently maintain key-man life insurance on any of our personnel.
Our success will also depend on our ability to attract, train and retain
additional management and other highly skilled personnel. Currently, we are
seeking to hire skilled engineers for our assembly process. Our competitors for
qualified personnel are often long-established, highly profitable companies and
the process of hiring qualified personnel is often lengthy. Our management and
other employees may voluntarily leave us at any time. We may not be able to meet
our sales forecasts if we cannot attract, train and retain sufficient qualified
personnel.
Our future profitability will also depend on our ability to develop an
effective sales force. Competition for employees with sales and marketing
experience is intense. We may be unable to attract and retain qualified
salespeople or build an effective sales and marketing organization. We require
sales people with a good technical understanding of our products and of the
industry.
THERE ARE SIGNIFICANT RISKS ASSOCIATED WITH THE PROTECTION OF OUR INTELLECTUAL
PROPERTY.
Problems associated with the protection of our intellectual property or
potential infringement of the intellectual property of others could have a
significant negative impact on our business and our financial condition.
The patent positions of technology companies, including ours, are
uncertain and involve complex legal and factual questions. The coverage claimed
in a patent application can be significantly reduced before a patent is issued.
Our patent applications may not result in patents being issued . Patents issued
to us may not provide protection against competing technologies and may not be
held valid if challenged. Others may independently develop products similar to
ours or design around or otherwise avoid patents issued to us.
Others may assert claims against us that will result in litigation.
Litigation, regardless of its outcome, would result in significant cost to us,
as well as diversion of management time. If we were to infringe upon a valid
patent, we might have to change our products or obtain licenses from the patent
owners. Licenses may not be available on favorable terms. In addition, we could
be liable for significant monetary damages.
We also rely on trade secret and copyright law and employee and
third-party nondisclosure agreements to protect our intellectual property
rights. We may be unable to secure meaningful protection of our trade secrets,
copyrights, know-how or other proprietary information in the event of
infringement by others and others may independently develop similar
technologies.
WE ARE CONTROLLED BY INSIDERS, WHICH MAY PREVENT A CHANGE OF CONTROL OR OTHER
CORPORATE TRANSACTIONS.
As of the date hereof, our management, Molex, Polyvalor and McGill
University collectively own in excess of 50% of our outstanding common stock.
Together, they determine the composition of the Board of Directors and will be
able to determine the outcome of corporate actions requiring stockholder
approval. This ability may have the effect of preventing a change in control
that may be favorable to other stockholders or causing a change of control that
may not be favorable to other stockholders.
10
<PAGE>
Under the agreements with Molex, Molex will acquire the non-exclusive
right to manufacture and sell jointly developed optical chip products in the
event we experience a change of control. Molex also has rights of first refusal
with respect to most sales of stock by members of our management. Their rights
may have the effect of preventing a change of control that may be favorable to
other stockholders.
PROVISIONS OF OUR CORPORATE DOCUMENTS AND APPLICABLE LAW MAY PREVENT OR HINDER A
CHANGE OF CONTROL.
Provisions of our certificate of incorporation and by-laws and of
applicable law could make it more difficult for another party to acquire us or
discourage another party from attempting to acquire us. This may reduce the
value of our common stock. For example, we could issue preferred stock with
rights senior to the common stock without any further vote or action by
stockholders. The issuance of preferred stock as part of a future financing
could have the effect of preventing a change of control and could make it more
difficult for holders of our common stock to take certain corporate actions,
including the replacement of incumbent directors. Additionally, preferred stock
may have preference over and harm the rights of the holders of common stock.
WE HAVE A SIGNIFICANT NUMBER OF OUTSTANDING WARRANTS AND OPTIONS, WHICH COULD
ADVERSELY AFFECT THE PRICE OF OUR COMMON STOCK AND OUR ABILITY TO SELL
ADDITIONAL COMMON STOCK.
As of October 31, 2000, we had outstanding options to purchase a total
of 3,590,150 shares of common stock at a weighted average exercise price of US$
15.20 per share and outstanding warrants to purchase an aggregate of 757,011
shares of our common stock at a weighted average exercise price of US$3.55 per
share. We also have outstanding warrants to purchase an aggregate of 5,000,800
shares of common stock, subject to anti-dilution provisions, at a price to be
determined in the future. The CDN$40,694,000 (US$28,000,000) five-year
convertible notes issued in July 2000 and still outstanding are also convertible
into a maximum of 5,000,000 shares of common stock, unless a default under the
notes has occurred.
No holder may convert any portion of the July 2000 notes or exercise any
portion of the July 2000 warrants to the extent that the conversion or exercise
would result in that holder or any of its affiliates beneficially owning more
than 4.99% of our outstanding common stock. Therefore, a holder may have to sell
shares of common stock in order to be able to convert notes or exercise
warrants. The following table sets forth the number of shares of common stock
issuable upon conversion of the July 2000 notes and exercise of the July 2000
warrants at various prices and the percentage of our common stock represented by
the shares of common stock issuable upon conversion of the notes and exercise of
the warrants at such prices assuming we have not defaulted on the notes:
<TABLE>
<CAPTION>
% of total
warrants vs. Number of % of total
Share Number of % of shares vs. Number of outstanding shares and warrants and
Price Shares outstanding shares Warrants shares warrants shares
----- ------ ------------------ -------- ------ -------- ------
Outstanding $28,000,000
Note
Amount
<S> <C> <C> <C> <C>
36,069,153 36,069,153 36,069,153
Maximum $25.00 1,120,000 3.11% 5,000,800 13.86% 6,120,800 16.97%
Exercise
Price
Minimum $7.00 4,000,000 11.09% 9,000,800 24.95%
Exercise
Price
Variable $24.00 1,166,667 3.23% 6,167,467 17.10%
$23.00 1,217,391 3.38% 6,218,191 17.24%
$22.00 1,272,727 3.53% 6,273,527 17.39%
$21.00 1,333,333 3.70% 6,334,133 17.56%
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
% of total
warrants vs. Number of % of total
Share Number of % of shares vs. Number of outstanding shares and warrants and
Price Shares outstanding shares Warrants shares warrants shares
----- ------ ------------------ -------- ------ -------- ------
<S> <C> <C> <C> <C> <C>
$20.00 1,400,000 3.88% 6,400,800 17.75%
$19.00 1,473,684 4.09% 6,474,484 17.95%
$18.00 1,555,556 4.31% 6,556,356 18.18%
$17.00 1,647,059 4.57% 6,647,859 18.43%
$16.00 1,750,000 4.85% 6,750,800 18.72%
$15.00 1,866,667 5.18% 6,867,467 19.04%
$14.00 2,000,000 5.54% 7,000,800 19.41%
$13.00 2,153,846 5.97% 7,154,646 19.84%
$12.00 2,333,333 6.47% 7,334,133 20.33%
$11.00 2,545,455 7.06% 7,546,255 20.92%
$10.00 2,800,000 7.76% 7,800,800 21.63%
$ 9.00 3,111,111 8.63% 8,111,911 22.49%
$ 8.00 3,500,000 9.70% 8,500,800 23.57%
$ 7.00 4,000,000 11.09% 9,000,800 24.95%
</TABLE>
The exercise of outstanding options and warrants and the conversion of
outstanding notes will dilute the then current stockholders' ownership of common
stock. Sales in the public market of common stock acquired upon exercise of
options and warrants and conversion of notes could depress the price of our
common stock. This may adversely affect our ability to sell common stock.
FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The words "believe," "anticipate," "estimate," "expect" or
words of similar import identify these forward-looking statements. These
forward-looking statements are contained principally under the headings
"Summary," Risk Factors," "Management's Discussion and Analysis to Financial
Condition and Results of Operations" and "Business." Although we have based
these forward-looking statements on reasonable assumptions, these may not prove
to be correct. Because these forward-looking statements are subject to risks and
uncertainties, actual results may differ materially from the expectations
expressed by these forward-looking statements. Important factors that may cause
actual results to differ materially from the expectations reflected in the
forward-looking statements include those set forth below, as well as:
o general economic, business and market conditions
o customer acceptance of new products
o the occurrence or nonoccurrence of circumstances beyond our
control.
All subsequent written and oral forward-looking statements attributable
to us are expressly qualified in their entirety by the cautionary statements. We
caution readers not to place undue reliance on these forward-looking statements,
which speak only as of their dates. We undertake no obligations to publicly
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
12
<PAGE>
USE OF PROCEEDS
The selling stockholders will receive all of the proceeds from the sale
of the shares of common stock offered by this prospectus. We will not receive
any of the proceeds from the sale of the shares of the common stock by the
selling stockholders.
We could receive proceeds of up to $50,008,000 if warrants were
exercised at their minimum exercise price, and proceeds of up to $150,024,000,
if warrants were exercised at their maximum exercise price, from the exercise of
warrants to purchase an aggregate of 5,000,800 shares of common stock issued as
part of the convertible notes financing described under "Business - Material
Agreements - Convertible Note Financing." These warrants can be exercised at the
option of their holder after January 25, 2002 (or earlier upon an event of a
default under the notes or our other obligations to the purchasers) and before
July 25, 2005. Given the uncertainty as to any exercise the timing of any
exercise and the amount that we would receive, management has not established
any specific use for these proceeds. They will be used for working capital and
general corporate purposes.
DIVIDEND POLICY
We have not paid and do not intend to pay cash dividends on our common
stock. We currently intend to reinvest earnings, if any, in the development and
expansion of our business. The declaration of dividends in the future will be at
the election of our board of directors and will depend upon our earnings,
capital requirements and financial position, general economic conditions and
other relevant factors.
MARKET PRICE OF THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
Our common stock has been traded on The Nasdaq National Market under the
symbol "LUMM" since April 13, 2000. From July 27, 1998 (the day on which trading
in the common stock commenced) through January 19, 2000, the common stock was
quoted on the OTC Bulletin Board. From January 20, 2000 to March 9, 2000,
pending the effectiveness of our registration statement on Form 10, trading in
our common stock was reported by the National Quotation Bureau in the pink
sheets. From March 9, 2000 through April 12, 2000, our common stock was quoted
on the OTC Bulletin Board. The following table sets out in US dollars the high
and low bid prices of the common stock during the periods indicated based on a
calendar year presentation. Prices through April 12, 2000 reflect inter-dealer
prices, without retail mark-up, markdown or commissions and may not necessarily
represent actual transactions.
High Low
1998
Third Quarter (from July 27th).................. US$4.00 US$0.63
Fourth Quarter.................................. US$1.50 US$0.25
1999
First Quarter................................... US$1.56 US$0.25
Second Quarter.................................. US$3.50 US$0.44
Third Quarter................................... US$14.25 US$1.63
Fourth Quarter.................................. US$49.00 US$3.50
2000
First Quarter................................... US$51.00 US$14.16
Second Quarter.................................. US$28.00 US$9.13
Third Quarter................................... US$28.50 US$14.50
Fourth Quarter (through November 8, 2000)..... US$28.44 US$10.44
13
<PAGE>
On November 8, 2000, the last reported sale price of the common stock on
The Nasdaq National Market was $11.38 per share.
On November 8, 2000, there were 104 holders of record of our common
stock.
14
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data are taken from our financial
statements included elsewhere in this prospectus and are qualified by reference
to and should be read in conjunction with such financial statements, including
the notes , and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this prospectus. Our financial
statements as of and for the fiscal year ended June 30, 2000, June 30, 1999 and
December 31, 1998 have been audited by KPMG LLP, Montreal, Canada, independent
certified public accountants. We changed our fiscal year end to June 30,
effective in 1999. The amounts reported below for fiscal year 1999 are for the
six-month period ended June 30, 1999.
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 JUNE 30, 1999 2000 JUNE 30, 2000
---- ------------- ---- -------------
(IN CANADIAN DOLLARS) (IN U.S. DOLLARS)
<S> <C> <C> <C> <C>
Current Assets $552,912 $2,044,584 $6,058,929 $4,097,745
Capital Assets - 1,492,495 4,602,682 3,112,865
Total Assets 553,155 3,547,080 12,199,898 8,250,978
Liabilities 119,349 1,002,582 1,885,401 1,275,125
Stockholders' 433,806 2,544,498 10,314,497 6,975,853
Equity
</TABLE>
<TABLE>
<CAPTION>
FROM INCEPTION SIX MONTHS FISCAL YEAR FISCAL YEAR
TO DECEMBER 31, ENDED ENDED ENDED
--------------- ----- ----- -----
(IN CANADIAN DOLLARS) (IN U.S. DOLLARS)
<S> <C> <C> <C> <C>
Research and
Development
Expenditures (1) $12,291 $162,370 $218,968,358 $148,091,681
General and
Administrative (2) 290,435 569,507 4,913,579 3,323,130
Other Income
(Loss) 15,217 (17,674) 319,823 216,301
Net Loss 287,509 749,551 223,562,114 151,198,510
Loss Per Share (3) $0.02 $0.04 $8.80 $5.95
</TABLE>
-----------------------------
(1) Amounts shown are net of tax credits and grants and include non-cash
expenses resulting from the issuance of common stock upon exercise of
the Molex services warrant.
(2) Includes depreciation of CDN$893,620 (US$604,369) for the year ended
June 30, 2000 and none before.
(3) As of December 31, 1998, June 30, 1999 and June 30, 2000, the weighted
average number of shares outstanding were 14,972,188, 17,480,767 and
25,415,601, respectively. We have never paid dividends on our common
stock.
15
<PAGE>
At June 30, 2000, the exchange rate between the Canadian dollar and the
U.S. dollar was CDN$1.4786 to US$1.00, respectively, based on the rate as of
each date issued by the Bank of Canada.
CURRENCY EXCHANGE RATES
The following table sets forth, for the dates indicated, the rates at
the specific date for the Canadian dollar per one U.S. dollar, each expressed in
Canadian dollars and based on the noon buying rate in New York City for cable
transfers in Canadian dollars as certified for customs purposes by the Federal
Reserve Bank of New York:
Fiscal Year Ended June 30, 2000
Rate at end of period 1.4798
Average rate during the 1.4732
period
High of the period 1.5079
Low for the period 1.4350
On November 10, 2000, the noon buying rate in the New York City for
cable transfers in Canadian dollars as certified for customs purposes by the
Federal Reserve Bank of New York was CDN$1.5460 = US$1.00.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
From inception (March 2, 1998) to December 31, 1998, our activities were
mainly oriented to our organization. In 1999, we changed our fiscal year end to
June 30, so information for the year ended June 30, 1999 reflects a six-month
period. During that period, highlights of the activities are represented by
financial arrangements entered into in connection with the construction of the
pilot plant and the acquisition of related capital assets. This management's
discussion and analysis focuses on the fiscal year ended June 30, 2000 compared
to the period from inception to June 30, 1999.
RESULTS OF OPERATIONS
We are a development stage company. We have not realized any revenues
from operations.
Research and development expenses in 2000, net of tax credits and
grants, were CDN$218,968,358 (US$148,091,681). Of these costs, CDN$217,358,739
(US$147,003,070) are non-cash expenses resulting from the issuance of 5,800,000
shares of common stock in consideration of services rendered by Molex under a
teaming agreement. These expenses were recorded at the average monthly market
price of the shares issued during the period in which the services were
rendered.
Research and development expenditures, other than those recorded under
the Molex agreement, net of tax credits and grants, were CDN$1,609,619
(US$1,088,611) during the twelve-month period ended June 30, 2000, compared to
CDN$174,661 for the period from inception to June 30, 1999, an increase of
CDN$1,434,958. From inception to June 30, 1999, we incurred little research and
development expenses because we were not yet engaged in full operations. At June
30, 2000, we had an existing operation consisting of a sizeable research and
development group, a facility and an expansion project underway. During the year
ended June 30, 2000, we designed new DWDM and WWDM products, developed materials
and processes and produced prototype devices.
General and administrative expenses were CDN$4,019,959 (US$2,718,761) in
2000, compared to CDN$859,942 for the period from inception to June 30, 1999, an
increase of CDN$3,160,017. The charges for the period from inception to June 30,
1999 consist mainly of salaries as a result of the increased number of
administrative personnel and related expenses to manage our expansion project
and the increase in activities . During 2000, we built a corporate structure
consisting of teams in corporate finance, research and development,
manufacturing, business development and corporate development.
Other income, net of interest expense, consisting of interest on cash
and term deposits and gain on foreign exchange, earned during the year ended
June 30, 2000 amounted to CDN$319,823 (US$216,301) compared to a loss of
CDN$2,457 for the period from inception to June 30, 1999, an increase of
CDN$322,280. The increase is due to the fact that we had more cash on hand
during fiscal 2000 than in the preceding period as a result of capital raised
through private placements and the exercise of warrants and options and because
of a favorable variation in the exchange rate between the Canadian and the US
dollar.
As a result of the above, our overall loss for the year ended June 30,
2000 amounted to CDN$223,562,114 (US$151,198,510) or CDN$8.80 (US$5.95) per
share, compared to CDN$1,037,060 for the period from inception to June 30, 1999.
Our activities are being ramped-up to our planned production levels. The
increased activities will require us to have additional employees, equipment and
resources to manage the organization. This should increase our monthly burn rate
by approximately CDN$1,000,000 by the end of Fiscal 2001.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
From our inception to June 30, 1999, we had been engaged in capital
raising, developmental and organizational activities and construction of our
pilot plant. During the year ended June 30, 2000, we made significant
investments in staffing and equipment. These investments and costs have been
financed mainly through proceeds of private placements and the exercise of
warrants and options. In 2000, we realized net proceeds of CDN$13,623,333
(US$9,213,670) from these sources.
17
<PAGE>
In July 1999, we issued 960,000 units of our capital stock at a price of
US$1.00 per unit. Each unit comprised one share of common stock and one warrant
for the purchase of one additional share at a price of US$1.50 per share before
June 2001. Of these warrants, 260,000 were exercised in the year.
In September 1999, we issued 407,000 additional units at a price of
US$4.00 per unit. Each unit comprised one share of common stock and one warrant
for the purchase of one additional share at a price of US$6.00 per share before
September 2000. Of these warrants, 151,000 were exercised in the year and the
balance of 256,000 were exercised in September 2000.
In September 1999, we issued 400,000 additional units to holders of
convertible notes issued in March 1999 upon the full conversion of their notes.
Each unit comprised one share of common stock and one warrant for the purchase
of one additional share at a price of US$0.90 per share before September 30,
2001. The warrants were exercised in July 2000. We issued an additional 30,000
units for US$15,000 to the underwriter who had placed the securities upon
conversion of the notes . The warrants included in the units issued to the
underwriter were exercised in December 1999 for proceeds of US$27,000.
In November 1999, we issued 21,500 units at a price of US$7.00 per unit.
Each unit comprised one share of common stock and one warrant for the purchase
of one additional share at a price of US$9.00 per share before September 30,
2000. These warrants were exercised in September 2000.
In November 1999, we issued 10,000 additional units at a price of
US$10.50 per unit. Each unit comprised one share of common stock and one warrant
for the purchase of one additional share at a price of US$15.50 per share before
October 31, 2000. The warrants expired without being exercised.
In November 1999, Molex exercised warrants issued to it in June 1999 to
acquire 1,666,667 shares at a price of US$0.90 per share for total proceeds of
US$1,500,000.
In January 2000, we issued 86,022 additional units at a price of
US$23.25 per unit for a total consideration of US$2,000,000. Each unit comprised
one share of common stock and one half of a common share purchase warrant . Each
warrant can be exercised to acquire one share of common stock at a price of
US$30.00 before December 7, 2000.
The second closing with Molex took place in March 2000 and resulted in
the issuance of 1,500,000 shares of common stock for cash consideration of
US$750,000.
Options to acquire a total of 742,850 shares were exercised during the
twelve-month period ended June 30, 2000 for total proceeds of US$742,850.
Additionally, warrants to acquire a total of 2,747,667 shares (including
1,666,667 shares issued to Molex upon exercise of its warrants) were exercised
in the twelve-month period ended June 30, 2000 for total proceeds of
US$3,348,000.
The funds raised through the above financing activities have been
partially offset by operating activities amounting to CDN$5,384,204
(US$3,641,421). We disbursed CDN$2,918,919 (US$1,974,110) in property and
equipment during the twelve-month period ended June 30, 2000 and made deposits
of CDN$1,525,168 (US$1,031,495) on lease agreements and equipment ordered.
At June 30, 2000, we had cash on hand of CDN$1,125,382 (US$761,113). In
addition, we had CDN$4,299,608 (US$2,907,891) in term deposits with maturity
dates no later than August 23, 2000 and with no restriction in their use. At
June 30, 2000, the market value approximated the carrying value.
The above balances in cash and term deposits, along with proceeds from a
financing of CDN$51,243,000 (US$35,000,000) of five-year convertible notes on
July 25, 2000 should, in management's estimation, be sufficient to meet our
financial needs until at least December 31, 2001, excluding unforeseen
significant capital expenditures. We had no financial obligations of
significance at June 30, 2000 other than operating lease commitments for our
existing premises and equipment and employment agreements. Minimum lease
payments under operating lease agreements for premises and equipment for the
next twelve months amount to CDN$978,497 (US$661,773).
We do not believe that inflation has had a significant impact on our
results of operations.
18
<PAGE>
SUBSEQUENT EVENT
On July 25, 2000, we sold CDN$51,243,000 (US$35,000,000) aggregate
principal amount of five-year convertible notes due July 25, 2005 to two
institutional investors. The notes bear interest at a rate of 7.5% per annum and
are convertible at any time into common stock at a conversion price based on the
closing bid price of the common stock at the time of conversion, with a minimum
conversion price of US$7 per share and a maximum conversion price of US$25 per
share. On October 16, 2000, notes in the aggregate principal amount of
CDN$10,549,000 (US$7,000,000), together with accrued interest, were converted
into 616,414 shares of common stock at a price equal to US$11.55 per share.
In connection with the financing, the investors also received five-year
warrants to purchase an aggregate of 5,000,800 shares of common stock. The
warrants are exercisable on or after January 25, 2002. The exercise price of the
warrants is based on a formula whereby the price may vary from US$10 per share
to US$30 per share. Based on the formula, the exercise price of the warrants
will be lower than the fair market value of the common stock at the time that
the warrants vest unless the fair market value of the common stock is equal to
or lower than US$10 per share.
We will apply APB-14 ("Accounting for Convertible Debt and Debt Issued
with Stock Purchase Warrants") and EITF 98-5 ("Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios") to determine the accounting treatment of the notes and the
warrants. These bulletins require that we allocate the proceeds from the notes
among the notes and the warrants. As a result, the notes will be discounted and
the beneficial conversion feature of notes will be recorded as financing
charges.
Because the notes are convertible at any time, financing charges will be
recorded as expenses at the date of the transaction. In addition, amortization
of debt discount over a period of five years will also be recorded as financing
charges. It is expected that an aggregate of CDN$51,243,000 of financing charges
will be recorded over five years. However, these additional charges are non-cash
transactions and accordingly will have no effect on our cash flows.
If the notes and unpaid interest calculated at the rate of 7.5% are not
converted into common stock, we will be required to pay an aggregate of
CDN$40,694,000 (US$28,000,000) plus accrued interest to the investors upon
maturity.
FUNCTIONAL CURRENCY
Because the Canadian dollar is primary in the economic environment in
which we operate, the Canadian dollar is our functional currency. Accordingly,
amounts presented in U.S. dollars are provided for convenience of reference only
and are based on the closing exchange rate at June 30, 2000, which was
CDN$1.4786 per U.S. dollar. The rate stated is from the Bank of Canada for that
date.
19
<PAGE>
BUSINESS
OVERVIEW
We are a development stage company. We design and develop products
related to the Dense Wavelength Division Multiplexing (DWDM) market and other
optical or photonic segments of the telecommunications market. DWDM is a
technology that permits a user to send multiple sources of information and data
at the same time over a single optic fiber. DWDM allows network operators to
remove an entire class of equipment in their networks.
We plan to manufacture DWDM devices in the form of optical chips using
our patented PHASIC process. This process allows us to manufacture DWDM chips in
high volume.
Our plan of operations for fiscal year 2001 is to finalize the
development of our DWDM devices and to bring them to market. We will focus
product development on four aspects:
o perfecting manufacturing steps for DWDM devices
o readying automation equipment in our new manufacturing facility
o setting quality control criteria for our operations
o expanding our packaging and pigtailing capability for our optical
chips.
We plan to finalize the installation of the clean room in our new
manufacturing facility. We expect to have the capacity of producing up to 500
devices per day in 2001 . We expect to increase our work force to approximately
175 persons to fully staff this facility . As a development stage company, we
have not generated product revenues to date. We do not anticipate generating
product revenues until 2001.
DWDM
Service providers like AT&T and MCI WorldCom are creating fiber optic
networks to transmit large quantities of information at high speeds . They must
meet demand for uses such as the Internet, e-mail and electronic commerce.
Service providers desire to increase the capacity of their networks without
installing new fiber optic cable. DWDM products allow them to greatly increase
their information carrying capacity on existing fiber . Existing DWDM products
use primarily the following technologies:
o thin film filters;
o fiber Bragg gratings; or
o array waveguides (AWG).
DWDM is a technology that allows multiple wavelengths of light to be
transported on a single fiber optical strand. This increases the carrying
capacity of optical fiber to transmit information at the speed of light. The
multiplexing component of the DWDM allows different wavelengths to be added to
the optical fiber. This means more channels can be added for simultaneous
transport. To date, the solution to resolve capacity constraint has been to add
or lay additional fiber in the ground or to use one of three kinds of DWDM
devices presently available. The devices can be circuits that have been etched
into chips (AWG), thin film filters or Bragg gratings. Using DWDM technologies
to add capacity to existing fiber networks should be less costly than installing
new fiber in the ground. By not having to install new fiber networks, operators
are able to avoid costs associated with construction, purchases of rights of
way, work and regulatory permits, and weather delays.
We make DWDM products in the form of an AWG "optical chip" on silicon
through a patented sol-gel manufacturing process. We call this process
PHASIC(TM). We acquired the initial rights to the process under our license
agreement with Polyvalor and McGill University. Through our research and
development, we have evolved the process. We now have two patent applications
pending relating to the process. To our knowledge, there are no other
manufacturers of DWDM products on silicon using a sol-gel manufacturing process.
We have chosen an optical chip form for our product development because we
believe that our PHASIC(TM) process will allow us to address market demand that
cannot be fully served with competing technologies.
We believe this because:
20
<PAGE>
o the PHASIC process requires a lower capital investment in
equipment, because there is no need for vacuum thin film
deposition and vacuum coating technology
o making the AWG chip requires less manual labor
o our process requires fewer steps, reducing the likelihood of
manufacturing defects
o as the optical chip's channel count grows, cost does not increase
proportionally.
We have focused on developing and producing DWDM devices and products
because we believe that DWDM technology offers a bandwidth solution to the
telecommunications market. The telecommunications market includes long distance,
metropolitan, and access. Bandwidth or information carrying capacity is critical
in each segment. DWDM is in a nascent stage for the metropolitan and access
markets.
INDUSTRY BACKGROUND
Manufacturers of systems that use DWDM devices include: Lucent
Technologies, Inc., Ciena Corp., Alcatel, Cisco, Nortel Networks Corp., NEC and
Fujitsu. Several of these systems manufacturers also manufacture DWDM products.
Other suppliers include: JDS-Uniphase Corp., Gould, Instruments , Corning OCA,
Ditech Communications Corp., DiCon, Sumitomo and Bosch.
Large companies like AT&T Corp. and MCI WorldCom Inc. are part of the
DWDM market. AT&T has used equipment supplied by Lucent Technologies, while MCI
has used equipment supplied by Hitachi Ltd. and Nortel.
Growth of Information Traffic
Computers increasingly process and send more information across networks
at greater speed. Voice-centered networks were not designed to handle data
efficiently. New data communications equipments have been designed and created
to route and switch data transmission at very high speeds.
The popularity of the Internet and new applications are putting pressure
on the networks of service providers. They are continually in need of
improvements to stay competitive. They are looking for ways to optimize their
existing networks and to increase capacity at a low cost . Optical fiber
networks are widely deployed for domestic and international carriage. Recent
increases in traffic, growing competition and increased demand for reliability
at lower cost have required carriers to enhance the service they provide. Part
of the solution has been the deployment of DWDM systems.
The flow of traffic has also increased by the growing capacity and
processing speed of data communications equipment. According to Ryan, Hankin &
Kent, a leading market researcher, Internet traffic will increase from 568,000
tera bytes per month at the end of 2000 to over 1.1 billion tera bytes per month
in 2004.
Competition
Widespread telecommunications industry deregulation in the United States
has resulted in increased competition among service providers. As carriers seek
to differentiate themselves from competitors, they have emphasized high capacity
technology to sell their services.
Reliability
Consumers and generators of information are becoming more dependent on
network reliability. End users are less and less tolerant of service
interruptions. Network carriers have responded by introducing fiber optic
networks that can overcome cable cuts or other equipment failure between two
points. These networks frequently utilize a "ring architecture" in which routes
are linked in a ring configuration, permitting rerouting of traffic along the
reverse path of the ring in the event of a service interruption caused by a
fiber optic cable cut or other equipment failure. Ring architectures require
twice the fiber capacity of non-ring systems. These system designs therefore
place greater bandwidth demand on existing fiber networks.
Other capacity drivers
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Other capacity drivers on fiber optic networks include technologies such
as digital subscriber lines (DSL). DSL promises higher access speeds to
residences and businesses. With potential speeds in excess of a megabit, this is
expected to continue to increase demand for bandwidth and impose additional
strain on the optical network backbone. PHASIC(TM) PROCESS
PHASIC(TM) PROCESS
Our patented manufacturing process for optical chips is called
PHASIC(TM). We acquired the initial rights to the PHASICTM process under our
license agreement with Polyvalor and McGill University. Through our research and
development, we have evolved the process. We now have two patent applications
pending relating to our process. PHASIC(TM) stands for Photonic Hybrid Active
Silica Integrated Circuit. This refers to the materials and processes we use to
produce our devices in the form of an integrated optical circuit on silicon
microchips similar to those used in computers. The optical circuit consists of a
collection of micron size array waveguide gratings (AWG) that have been arranged
to combine, or multiplex, or separate, or demultiplex, light at the
telecommunications wavelengths. More specifically, we use hybrid glasses for
making our AWG and a simplified manufacturing process for creating our optical
circuits on silicon. The "hybrid glass" is a glass-polymer solution. It can be
used to print circuits on chips through light. We can do so without the costly
vacuum etching process or the use of manual labor for assembly of micro-optic
devices. We expect to be the first to commercialize hybrid glasses for use in
integrated optics.
The optical chip contains an optical circuit analogous to the
micro-electronic circuits used in computers. DWDM optical circuits can be made
with 4, 8, 16, 32, 40, 64 and more channels to transport different optical
signals at different wavelengths. Light signals are combined and separated on
the optical chip by taking advantage of the differences in the length of the
individual waveguides in the AWG. These path differences translate into optical
phase differences. Multiplexing means that light of a given wavelength can be
combined with others for input into an optical fiber. Demultiplexing means that
with the same device, light can also be separated for output to individual
optical fibers. This technology simplifies the process while adapting to the
industry's changing needs.
PLAN OF OPERATIONS
Our plan of operations for fiscal year 2001 is to get our plant and
volume production up and running in order to produce 8, 16, 32 and 40 channel
DWDM devices and bring them to market. Volume production will be realized by
o completing the installation of our large scale manufacturing
infrastructures;
o defining processing sequences and conditions that distinguish
fabrication of devices;
o increasing staffing and investing in the training of our
employees;
o implementing a framework for quality control and reliability
testing;
o expanding our DWDM packaging and pigtailing capability; o
broadening our product portfolio; and
o securing our supply chain.
Research and Development
Research and development activities for fiscal year 2001 will be
centered on finalizing the packaging of our DWDM products and optimizing our
manufacturing processes. We will also focus on developing new products that we
judge to be of value to the photonics market.
Manufacturing
At the end of June 2000, we moved our headquarters to a new site located
in Ville St-Laurent, a suburb of Montreal, Canada. The 53,427 square foot
headquarters has a 34,400 square foot manufacturing facility that features
materials preparation, fabrication, packaging, optical test and quality control
facilities for our DWDM products. We are currently completing the installation
of the production facility, including cleanrooms and associated laboratories.
Our existing R&D facility, located in Dorval, Quebec, will be used for
prototyping once the Ville St-Laurent facility is operational.
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Employee Growth
We currently have 100 employees. Over the past 12 months, we have
increased our corporate division to 30 persons. The existing R&D division of 27
meets current requirements and will be increased at a measured pace as we
identify new requirements. Most of our personnel growth will be within the
operations division, which must increase its manufacturing component to
approximately 75 hourly employees and 25 specialists/technicians in order to
meet the current production forecasts for fiscal 2001 and first quarter of
fiscal 2002. Headcount growth thereafter will depend on volume requirements and
will primarily focus on hourly employees. Most of the manufacturing employees
whom we will hire will be fully trained in a few months. Combined with the
employees remaining at the Dorval pilot facility, the total employee count is
anticipated to be in the range of 225 employees by the end of 2001.
BUSINESS STRATEGY
We believe that there is a substantial market for our devices. This
market may be best supplied using AWG, which provides high channel counts in a
single compact device.
Optical chips in AWG format are currently used in DWDM systems.
Companies that produce the AWG format are PIRI (a subsidiary of JDS Uniphase),
Kymata and Siemens. These AWG devices perform in a similar way. However, DWDM
devices can differ both in composition and method of fabrication depending on
how they are processed. Devices made by PIRI, Kymata and Siemens use a high
temperature vacuum deposition process called "flame hydrolysis deposition"
(FHD). This process uses a repetition of steps to achieve final composition of a
device.
The devices that we produce differ in composition and method of
fabrication. Our AWG devices are made of hybrid sol-gel glass. They are made at
temperatures about 1,000(0)C lower than those used in FHD. The devices are
created by photolithography directly in the hybrid glass, avoiding vacuum film
deposition. They have optical properties that can be tuned over a broader range
than those provided by commercial forms of FHD. This allows us to make smaller
devices than those produced by FHD. Smaller devices permit manufacturers to
deploy their systems in locations where space is limited, providing greater
design flexibility. The materials and method of fabrication that we use also
allow us to make AWG devices faster and in larger quantities . We believe, at
present, that no other manufacturer utilizes the sol-gel method in the
commercial production of optic devices for use in the DWDM market.
Our goal is to provide high quality, cost effective and high volume DWDM
devices. We developed our PHASIC(TM) process because we believe that high volume
manufacturing methods similar to those used by the microelectronics
manufacturing industry are necessary to meet telecommunications customer demands
for high volume and reliability. We believe that our process gives us a
technological edge that will allow us to improve yield in optical chip
production.
We have begun producing and testing a limited number of devices with the
intention to market 4, 8, 16, 32 and 40 channel DWDM products. In addition, we
intend to offer services based on our capability to design new customized DWDM
devices according to specific client needs. For example, we are presently
targeting an existing DWDM market that has for the most part, very specific
needs. Because we manufacture our DWDM devices from a platform technology, we
can use similar materials and processes to produce customized devices . Examples
include optical chips for selectively adding or dropping channels and optical
cross-connects.
The platform technology allows us to expand from our DWDM chip into new
kinds of optical chip products. We believe that customers may favorably view the
idea of having optical devices that are all related to one another through a
common technology. Photonics is a nascent industry and we believe that it will
be necessary to work with customers closely to meet their specific needs. In
this competitive industry, we face many risks, including market acceptance of
our products and our ability to adapt our products to technological change.
To implement our strategy, we intend to :
a) Establish Technology Leadership
There are three primary multiplexer component technologies currently
used in DWDMs: thin film filters, fiber Bragg gratings and array waveguides
(AWG). According to a report in Laser Focus World Supplement, "WDM Solutions,"
in 1998, thin filters held a 26% share of the DWDM market, AWG had a 47% share
of the DWDM market
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and Bragg gratings had a 19% market share. Within the industry, AWG technology
currently provides the least costly manufacturing alternative to expanding
existing capacity.
In existing AWG technology, a "flame hydrolysis deposition" (FHD) method
is used to manufacture DWDM components and devices. This method burns the
desired combinations of gases to produce a glass soot on the surface of a
silicon substrate. The soot is melted and consolidated at temperatures greater
than 1,000(degree)C in a lengthy thermal process. The procedure is repeated at
least three times to achieve the final composition. The second coating step is
usually followed by a series of coating and vacuum etching steps . In some
cases, a thin section of polymer is inserted into the array waveguide section to
desensitize the device to the polarization state of the light.
Thin film filter glass windows are five millimeters in size. They are
coated with multi-layers of metal oxide. This layered structure is used to pass
through some wavelengths of light and reflect others in transferring information
or data. These windows act as an optical filter when many are assembled together
with lenses and appropriate input and output filters. Then, together they can
selectively separate wavelengths of light for transmission of information.
In this way, the thin film filter device acts as a mutliplexer device.
Bragg gratings act as micro optical filters. The grating spacing is
selected in a way that allows some wavelengths of light to pass through the
filter and reflects other wavelengths of light. When several Bragg gratings are
created in optical fiber and assembled together in a structure like an
interferometer, the Bragg gratings assembly acts as a multiplexer device.
We believe that the following three variables, discussed in detail
below, will determine the relative successes of the three competing
technologies:
o Chip manufacturing cost per channel
o Size of the optical component
o Suitability to high volume manufacture.
We believe that our products, which use AWG format, will enjoy an
advantage in each case.
Chip Manufacturing Cost Per Channel. In AWG technology, cost does not
scale with an increase in the number of channels per chip because all channels
are created simultaneously or in parallel. There is little increase in the cost
of manufacturing an 8-channel, 16-channel or other channel AWG DWDM chip because
the circuits and optical channels are all created in the same step. In contrast,
in thin filter and Bragg gratings technologies, additional channels must be
added one at a time, increasing the complexity of the task and adding time and
cost to the process. Thus, the current manufacturing cost per channel is lower
for AWG technology.
The cost of making an AWG DWDM component will depend on the method and
materials used. Our products are distinguishable from those of our AWG
competitors in their composition and method of fabrication. We believe that our
simple PHASIC(TM) manufacturing process should be cost effective and suitable
for high volume and high yield manufacturing.
Size of Optical Components. AWG technology products are smaller by a
factor of three than those produced by competing technologies. This is an
advantage where space is at a premium.
Suitability to High Volume Manufacture. Our manufacturing process is
simpler, because the complexity of the process does not increase linearly with
an increase in the number of channels per chip, as is the case with competing
technologies. We anticipate that as optical chip technology matures, customer
demand and competition will drive down the price of chips. Our low temperature
manufacturing process should permit lower cost production and higher product
yield.
Our devices differ from other DWDM devices in composition and method of
fabrication. The use of hybrid glass and the sol-gel processing gives us the
advantage of being able to use spin-coating and dip-coating manufacturing
methods to cover silicon wafers rather than vacuum deposition techniques. Our
hybrid glasses are made at temperatures about 1,000(degree)C lower than those
used in FHD chip production. This gives us an energy saving advantage and
provides a greater choice in the range of substrates e.g., glass, plastic, that
might be used in the future to support DWDM devices . Our DWDM optical chips are
created by photolithography directly in the hybrid glass. This avoids complex
post-processing sequences in which chemical resists and masks must be used in
conjunction with vacuum reactive ion etching methods. The properties of the
hybrid glass materials can be tuned to be like those
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of plastics or inorganic glasses. This permits hybrid glasses to be adapted into
more commercially usable and compact forms . Smaller DWDM devices also permit
manufacturers of systems to make more compact products.
b) Leverage Existing Customer Relationship and Develop New Relationships
In May 1999, we entered into a teaming agreement with Molex, a global
manufacturer of electronic, electrical and fiber optic interconnection products
and systems. The teaming agreement was amended in March 2000. Under the teaming
agreement, we agreed with Molex to jointly develop DWDM products for sale to
Molex and distribution and marketing by Molex to other customers. Subject to
testing of our technology and proof of our manufacturing capability, Molex is
committed to purchase 400 units per month for the first 12 months, and has the
option to purchase 50% of our DWDM production. See "Material Agreements -
Agreements with Molex." This arrangement should provide a firm customer base for
our early production. We also propose to establish relationships with
telecommunications equipment manufacturers and with manufacturers in other
industries with potential applications for its devices.
c) Target Long Distance, Metropolitan Area and Access Markets
Our products are designed to meet the requirements of long distance
telecommunication and metropolitan markets. We believe that much of the
potential expansion of the market for our products will occur in metropolitan
areas. This is a result of technological advances and the potential to reduce
manufacturing costs.
d) Expand Manufacturing Capability
Our prospective customers are expected to require high volumes of
products manufactured to high quality standards at gradually decreasing prices.
We are currently expanding beyond our existing Research and Development facility
in Dorval to a full scale manufacturing facility in Ville Saint-Laurent, with a
production capability of 500 devices per day. We are finalizing the completion
of the 34,400 square foot manufacturing facility in order to begin production in
2001.
TECHNOLOGY AND PRODUCTS
We use a liquid sol-gel process to produce our DWDM devices. Sol-gel
processing converts molecules of silicon-containing compounds into a network of
glasses. Based on our experience in developing the process, and our intellectual
property rights governing it, we believe we have a significant lead time as the
only producer of compact AWG DWDM devices using a low temperature sol-gel hybrid
glass process. We use conventional photolithography, which is a method to
"print" optical circuits and devices directly into its hybrid glasses. A pattern
of the AWG is made by projecting an image of the pattern with ultra-violet light
that passes through the patterned openings of the mask and "writes" or
"projects" the AWG image directly into hybrid glass film . The procedure is
similar to the way photographs are printed in a darkroom.
Platform Material Technology
We use manufacturing methods that have been long accepted by the
semiconductor and microelectronics industries. We have adapted these methods to
produce hybrid silica glass integrated optics devices. The materials used to
formulate the hybrid glasses are custom designed and readily available from
manufacturers like Dow Corning, Aldrich Chemical and Ciba Specialty Chemicals
Ltd. Because the quantity of material used to make a device is very small, the
cost of the materials is less than 5% of the total cost of the DWDM product,
making the material cost-competitive with silica or polymers. Additionally, our
methodology reduces costs by avoiding complex and costly processing and etching
sequences. Through the use of our process, we should, in the future, be able to
supply a variety of valuable customized products. We believe that the relative
simplicity of our PHASIC(TM) process, using hybrid glasses, will enable us to
fabricate optical chips across the broadest range of photonic market
opportunities in high volume.
Technological Leadership
We have assembled a team with broad expertise in materials formulation,
photonic device design, hybrid glass integrated optics circuit fabrication,
product definition and industrial process engineering. This team has pioneered
the development of "photonic chips on silicon" based on proprietary formulations
of hybrid glasses and the creation of software design tools . Our technical
structure comprises software development/optical circuit design, materials
formulation and process engineering. This should allow us to evolve as a
significant provider of integrated optics products to the photonic industry.
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We have also created a technical advisory board to advise us on photonic
market trends and technology and to assist in the development of an optical
information technology "roadmap" for our benefit. This board consists of three
external scientists with extensive experience and expertise in the industry.
Advanced Software Design Tools
We use both proprietary and industry standard design tools to create our
DWDM devices. We have developed in-house theories and software algorithms for
creating product designs . We are unaware of any commercially available design
packages that compete with our software capability. Whether or not other
entities have developed software design tools of quality competitive with ours
should have no impact on our business, which uses our software in a manner
uniquely adapted to the photonic materials and processes we have developed. We
have also obtained licenses for industry standard computer aided design (CAD)
and beam propagation method (BPM) software to model or design selected
performance features of simpler devices, like couplers and splitters.
MANUFACTURING
We have commenced the manufacture of our prototype devices in our
custom-designed pilot microfabrication facility located at Dorval, Quebec. The
capacity of this facility is 20 DWDM chips per day. As of October 2000, we have
not sold a finished product in the open market. The current generation of chips
is being used for development and test phases. This includes the development of
solutions for pigtailing optical fiber to the DWDM chips, and for hermetic,
semi-hermetic and non-hermetic packaging.
We have been aggressively pursuing a photonic device packaging
research program, which has resulted in a high quality packaging solution for
passive photonics devices. Currently, our packaging technology allows for the
production of mechanically robust environmentally resistant packages. Key
technologies which have been addressed, solved and continually improved include,
but are not limited to:
o Chip Preparation: It is extremely important to ensure that the
chip-level devices produced are consistently identical. One of
the key developments achieved by us within the package program is
the ability to continually produce devices of exactly the same
dimensions every single time and at an extremely high rate. This
facilitates the mass production of chip-level devices.
o Device Pigtailing: This technology is concerned with bonding
multiple fibers to the photonic devices with submicron accuracy.
The purpose of pigtailing devices is to facilitate external
communication with the functional device contained inside the
package.
o Thermal Management: Concerned with ensuring that the end-user has
the capability of accurately controlling the temperature of the
environment within the package to ensure that the product
conforms best to their requirements.
o Environmental Protection: We have developed a packaging strategy
which produces packages which are highly resistant to mechanical
and thermal stress and shock cycles. The package also exhibits
excellent resistance to moisture and humidity.
Finally, we understand that, due to the immature nature of photonics packaging
expertise worldwide, there is a need to have an extremely active packaging
research program which can respond rapidly to developments in technology and in
the marketplace and also to ensure continual optimization and improvement of our
packaging process and strategy.
We rely largely on our own processes for the manufacture of our
products. In order to meet the projected demand for high volume, low cost
photonic chip production, are in the process of equipping and staffing a full
scale production facility. We anticipate developing our manufacturing capacity
to 500 packaged chips per day in 2001 and 1,000 per day in 2002.
PROPRIETARY RIGHTS
Our future success and ability to compete are dependent, in part, upon
our licensed and owned technology. We rely in part on patent, trade secret,
trademark and copyright law to protect our intellectual property. We are the
licensee of three patent applications under the terms of a license agreement
with Polyvalor and McGill University, which expires in October 2017. These three
patent applications are:
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1. Title: "Solvent-assisted lithographic process using
photosensitive sol-gel derived glass for depositing ridge
waveguides on silicon" Use: Intellectual property relating to our
sol-gel process used to make our optical circuit devices on a
broad range of substrates, including silicon through simplified
photolithographic processes and wet etching techniques, which is
fundamental to the success of our manufacturing process.
Country: United States
Assignee: McGill University
Status:Allowed and issued as patent No. 6,054,253 on April 25,
2000.
2. Title: "Solvent-assisted lithographic process using
photosensitive sol-gel derived glass for depositing ridge
waveguides on silicon" Use: Intellectual property relating to our
sol-gel process used to make our optical circuit devices on a
broad range of substrates, including silicon through simplified
photolithographic processes and wet etching techniques, which is
fundamental to the success of our manufacturing process. Country:
Canada Assignee: None Status:Pending. The next step in this
patent application is to file the request for examination.
3. Title: "Self-processing of diffractive optical components in
hybrid sol-gel glasses"
Use: Intellectual property used to make diffraction gratings in
hybrid glass without the need for device development steps, which
is not material to our present manufacture of products, but is
relevant and being sought for later generation products planned
for production.
Country: Initially filed on October 26, 1999 as a provisional
United States patent application, this case is presently
continued through an International patent application filed
October 26, 2000 and designating all the countries forming part
of the Patent Cooperation Treaty, including the United States and
Canada. The priority date of October 26, 1999 was claimed in the
International patent application.
Assignee: None Applicants: This patent application has been filed
in the name of McGill University, Polyvalor, CNRS, LILT, and the
inventors. Assignments will be required during the prosecution of
the subsequent national phases to confirm the assignee(s).
Status: Pending Provisional: the patent application is pending
but is incomplete and the priority date for filing the complete
patent application in the United States and for extending the
patent application in other countries is October 26, 2000. We are
presently in the process of finalizing the application. Pending.
The next step will be the issue of the International search
report from the European Patent Office.
We have has also filed the following patent applications:
4. Title: "On-substrate cleaving of sol-gel waveguide"
Use: Intellectual property used to make optical coupling between
glass fiber and optical circuit device waveguides, which is not
material to our present production of products, but is relevant
and being sought for later generation products planned for
production.
Country: United States
Owner: Co-ownership between Lumenon and Paul Coudray
Status:Pending: the patent was filed on July 1, 1999. We recently
received a first examination report stating that the invention is
patentable and that the application needs amendment for formal
matters only. and is awaiting review and comments from the
examiner. The priority date for filing of the patent application
in other countries was July 1, 2000 and the application was not
extended to other countries.
5. Title: "Sol gel film coating process using chilled solution"
Use: Intellectual property used to make a sol gel film where the
thickness and roughness of resulting film are improved by
dispensing a chilled sol gel solution instead of conventionally
dispensing such a sol gel at room temperature. We presently use
this technology in our manufacturing process.
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Country: Canada
Status:Pending Informal: the patent application is pending but is
informal and the priority date for filing the complete patent
application in Canada and for extending the patent application in
other countries is July 28, 2001.
6. Title: "Flattening the response of a planar wavelength division
multiplexer using a Y-junction"
Use: Intellectual property used to flatten the response of a
planar wavelength division multiplexer through a Y-junction. We
presently use this technology in our manufacturing process.
Country: Canada
Status:Pending Informal: the patent application is pending but is
informal and the priority date for filing the complete patent
application in Canada and for extending the patent application in
other countries is August 4, 2001.
These patents may or may not be issued to us. If issued, they may be
invalidated, circumvented, challenged or licensed to others, all of which is not
under our control. Any patents issued to us may not be adequate to safeguard and
maintain our proprietary rights, to deter misappropriation or to prevent an
unauthorized third party from copying our technology, designing around the
patents owned by us or otherwise obtaining and using our products, designs or
other information. In addition, our competitors may develop similar or superior
technologies.
We also rely on confidentiality agreements to protect our proprietary
rights. It is our policy to require employees and consultants and, when
possible, suppliers, to execute confidentiality agreements upon the commencement
of their relationships with us. Litigation may be necessary to enforce our
intellectual property rights and to protect our trade secrets, and there can be
no assurance that our efforts will be successful. Our inability to protect
proprietary rights effectively could have a material adverse effect on our
business, financial condition and results of operations.
Many participants in the photonics and related communications industries
have a significant number of patents and have frequently demonstrated a
readiness to commence litigation based on allegations of patent and other
intellectual property infringement. Although we are not aware of any claim of
infringement or misappropriation against us, there can be no assurance that
third parties will not assert claims in the future with respect to our products.
Responding to claims , regardless of merit, could cause product shipment delays
or require us to enter into royalty or licensing arrangements. Claims could also
lead to costly litigation that would require significant expenditures of time,
capital and other resources by us and management. Moreover, no assurance can be
given that any necessary royalty or licensing agreement can be obtained on
commercially reasonable terms.
MATERIAL AGREEMENTS
Agreements with Molex
On May 19 and June 21, 1999, we entered into several agreements with
Molex (NASDAQ: MOLX), based in Lisle, Illinois. Molex is a 60 year-old global
manufacturer of electronic, electrical and fiber optic interconnection products
and systems, switches, value-added assemblies and application tooling. The Molex
agreements include a teaming agreement, a stock purchase agreement, a stock
restriction agreement and a registration rights agreement. The teaming agreement
was amended on March 3, 2000.
Under the teaming agreement, we agreed with Molex to jointly develop
DWDM products . Subject to our testing and proving our technology and our
ability to manufacture and deliver the devices, Molex is committed to purchase
our entire DWDM production for the first 12 months of production, up to 400
units per month. Molex also has the option to buy 50% of our remaining chip
production. After the first 12-month period, Molex will have the option to
purchase 50% of our DWDM production for the succeeding three-year period. Any
product sold by us to Molex will be priced at our gross cost. In addition, Molex
will pay to us 30% of the profits obtained on final products built from the
chips supplied, 50% of the profits from sales of functionally unmodified
packaged products and 30% of the profits from sales of other final products.
We are free to package and sell any remaining products, with all profits
going to us. However, we cannot sell unpackaged chips for telecommunication
applications, except for special order or exploratory purposes, without written
agreement from Molex.
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In the event we are unable to supply Molex on a timely basis with a
commercially reasonable quantity of the devices or in the event we have a change
of control, Molex has the non-exclusive right to manufacture all components of
the devices in return for a royalty equal to 50% of the profits from sales of
functionally unmodified packaged products and 30% of the profits from sales of
other final products.
Under the stock purchase agreement, Molex purchased 3,000,000 shares of
our common stock at a price of US$0.50 per share in two stages. We also issued
to Molex a warrant to purchase 1,666,667 additional shares of common stock at a
price of US$0.90 per share, which was exercised on November 15, 1999.
In addition, we issued Molex a services common stock purchase warrant
(the services warrant) to receive 5,800,000 additional shares of common stock in
exchange for services to be rendered by Molex as part of the development of our
technology. These shares were issued in 2000 as Molex performed services.
The exercise price
of the services warrant was set at US $0.2155 per share.
Under the stock restriction agreement, Najafi Holdings Inc. and Andrewma
Holdings Inc., have agreed not to sell their shares of our common stock to a
competitor of Molex without Molex's prior consent. This agreement also includes
a right of first refusal and preemptive rights in favor of Molex, except that we
can, without Molex's consent, issue up to 6,000,000 units (comprising one share
of common stock and a warrant ) at a price not less than US$0.50 per unit to
raise capital within the period ending in June 2001. The stock restriction
agreement also requires the consent of Molex for extraordinary actions relating
to our governance and our operations, including amending our organizational
documents, issuing or selling securities to a Molex competitor, declaring
dividends, replacing our chief executive officer, merging or acquiring the
material assets of another company, or transferring or licensing any of our
intellectual property. Upon completion of a public sale or a public offering,
the preemptive rights in favor of Molex will terminate. The stock restriction
agreement will also terminate if the teaming agreement is terminated.
The net proceeds of the issuances of stock to Molex were used in part to
accelerate the commercialization of our DWDM products.
Agreement with Polyvalor and McGill University
We entered into a license agreement with Polyvalor, a Canadian limited
partnership, and McGill University (together, Polyvalor and McGill University
are referred to as the Licensor) pursuant to which we acquired the right to
produce, sell, distribute and promote products derived from patents and know-how
of the licensor, subject only to a license granted to QPS Technology Inc. in May
1998. To date, QPS Technology Inc. has not demonstrated any desire or capability
to utilize its license for production of any related technology or products.
These patents and know-how are based on the work of Dr. Iraj Najafi at Ecole
Polytechnique and Dr. Mark Andrews at McGill University and their respective
team of collaborators. We will pay a royalty of 5% on gross sales, up to a
maximum cumulative amount of CDN$3,500,000 (US$2,367,104) to the licensor until
October 2017, at which time the license agreement will expire. We do not believe
that the rights granted to us under the license agreement will be of significant
value after that date. If this is not the case, we would seek to extend the term
of the license agreement. Polyvalor is a company created by Ecole Polytechnique
for the purpose of commercializing the technology in which Polytechnique has an
interest.
In connection with the license agreement, we issued to each of McGill
University and Polyvalor 750,000 shares of our common stock and granted them
jointly the right to nominate one director to our board of directors.
Agreement with Polaroid
We entered into an agreement dated July 21, 2000 with Polaroid
Corporation for the irrevocable non-exclusive license of patents held by
Polaroid in connection with AWG. We agreed to pay to Polaroid an initial
licensing fee of CDN$584,047 (US $395,000). In addition, we will pay royalties
on the net selling price of our products, at an annual rate of 5% for aggregate
net selling prices of US$5 million, 3.5% for aggregate net selling prices over
five and up to US$40 million, and 1.75% for aggregate net selling prices over
US$40 million, for each year of the agreement.
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<PAGE>
Convertible Note Financing
On July 25, 2000, we sold CDN$51,243,000 (US$35,000,000) aggregate
principal amount of convertible notes due July 25, 2005 to two institutional
investors. The notes bear interest at a rate of 7 1/2% per annum, which is
payable upon the earlier to occur of the repayment or conversion of the notes.
The notes are convertible into shares of common stock at a price equal to the
average of the closing bid prices of our common stock for the five consecutive
trading days ending immediately prior to conversion, but in no event less than
US$7.00 nor more than US$25.00 per share (unless a default under the notes has
occurred).
On October 16, 2000, notes for an aggregate principal amount of
CDN$10,549,000 (US$7,000,000), together with accrued interest, were converted
into 616,414 shares of common stock at a price of US$11.55 per share.
Commencing 30 months after the issuance of the notes, we may require
their conversion if all of the following conditions are met:
o the volume weighted average price for our common stock for any 40
consecutive trading days equals or exceeds US$50.00;
o the average trading volume of our common stock during these 40
consecutive trading days equals or exceeds 120,000 shares per
day;
o the shares of common stock issuable upon conversion of the notes
are authorized and reserved for issuance, registered for resale
and eligible to be traded on the New York Stock Exchange, the
American Stock Exchange or The Nasdaq National Market; and
o there is not an uncured event of default under the notes.
The notes provide for various events of default, which would entitle
their holders to require their immediate repayment together with an additional
default amount. The amount payable upon an event of default would be equal to
the greater of:
(a) 115% of the principal amount of the notes plus accrued
interest; and
(b) the quotient obtained when (c) is divided by (d) where:
(c) is the principal amount of the notes plus accrued interest;
and
(d) is the conversion price on the date we receive notice of the
default multiplied by the highest closing bid price of our
common stock during the period beginning on the date we
receive notice of the default and ending the date preceding
the payment of the default amount.
Events of default include:
o our failure to pay the principal amount of the notes or accrued
interest on the notes for five trading days after the due date;
o our failure to make any payment with respect to any indebtedness
greater than $100,000 to a third party;
o our default under any agreement that would materially adversely
effect us;
o the suspension of our common stock from trading for 10 trading
days in any nine month period;
o the failure to have this registration statement declared
effective by April 21, 2001;
o the suspension of effectiveness for more than 30 days;
o our failure to remove restrictive legends from the certificates
for the common stock;
o our indication that we do not intend to issue shares of common
stock upon conversion of the notes;
o our breach of any material term of the notes or the other
agreements entered into in connection with the notes; and
o the institution of bankruptcy proceedings.
The holders of the notes may also require repayment, together with an
additional redemption amount, calculated as for an event of default, upon
extraordinary events, including:
o the sale or disposition of substantially all of our assets;
o a merger or consolidation where we are not the surviving entity;
and
o the acquisition of at least 50% of the voting power of our common
stock by one person, entity or group, other than our current
majority holders.
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<PAGE>
The proceeds of sale of the notes are being used in part to complete the
buildout of our new manufacturing facility in Ville Saint-Laurent. These
proceeds will also be used to pursue our overall growth strategy and to finance
our research and development program.
In connection with the financing, we issued to the purchasers five year
warrants vesting in January 2002. These warrants entitle their holders to
purchase 5,000,800 shares of our common stock. The exercise price fluctuates
subject from a minimum of US$10.00 and a maximum of US$30.00. If the volume
weighted average price of our common stock during the five consecutive trading
days preceding vesting is equal to or less than US$30.00, then the exercise
price will be US$10.00. If the average price is greater than US$30.00, but less
than US$70.00, then the exercise price will be the sum of US$10.00, plus
one-half of the excess over US$30.00. If this average price is more than
US$70.00, then the exercise price will be US$30.00. The number of shares of
common stock issuable upon exercise of the warrants and the exercise price of
the warrants are subject to adjustment upon the issuance of convertible
securities at a conversion/exercise price that is less than the then current
market price, stock splits, stock dividends and other recapitalizations. In
addition, upon a consolidation, merger or sale in which we are not the surviving
entity, we must require that our successor assume our obligations under the
warrants. If we declare or make any distribution of assets or rights to acquire
shares to our stockholders, the holders of the warrants who exercise them will
be entitled to receive equivalent assets or rights as if they had been a holder
of common stock on the date of the distribution. In the event of a default under
the notes or in other of our obligations to the purchasers, vesting of the
warrants may be accelerated.
We also agreed with the purchasers to register for resale under the
Securities Act of 1933, as amended, 8,800,000 shares of common stock issuable
upon conversion of the notes and exercise of the warrants. The registration of
these shares is covered by this registration statement .
CUSTOMER RELATIONS
In addition to the relationship created under the Molex agreements, we
will need to work in close association with DWDM system manufacturers. Examples
of these manufacturers are Nortel Networks, Cisco, Alcatel, Lucent Technologies,
and Ciena. We have had discussions with purchasers and designers of
manufacturers to evaluate their requirements. We believe that it will be
important to our success to work directly with customers the design of our DWDM
devices . This will allow us to foster a strong commitment to service and to
gain insights into our customers' future plans.
COMPETITION
There are several competitors producing DWDM products in the market.
Manufacturers of DWDM systems that may use AWG devices include Lucent
Technologies, Ciena, Alcatel, Cisco, Nortel, NEC and Fujitsu. Several of these
systems manufacturers also manufacture DWDM products. Other DWDM component
suppliers include JDS-Uniphase, Gould, Instruments SA, Corning OCA, Ditech,
DiCon, Sumitomo, Bosch Kymata Ltd., Lightwave Microsystems Corp. (LMC) and
Bookham Technology Limited.
We expect competition to increase in the future from existing
competitors and from companies that may enter our markets, with solutions that
may be less costly or provide better performance or features . To be successful
, we must continue to respond promptly and effectively to changing customer
performance, feature and pricing requirements, technological change and
competitors' innovations.
Many of our potential customers have substantial technological
capabilities and financial resources. These customers may currently be
developing, or may in the future decide to develop or acquire, products or
technologies that are similar to or may be substituted for our products, which
may diminish purchases of our products. A number of our current and potential
competitors have longer operating histories, greater name recognition, access to
larger customer bases and significantly greater financial, technical, marketing
and other resources than us. As a result, they may be able to adapt more quickly
to new or emerging technologies and changes in customer requirements or to
devote greater resources to the promotion and sale of their products. In
addition, current and potential competitors may determine, for strategic
reasons, to consolidate, to lower the price of their products substantially or
to bundle their products with other products. Current and potential competitors
have established or may establish financial or strategic relationships among
themselves or with existing or potential customers, resellers or other third
parties. Accordingly,
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<PAGE>
it is possible that new competitors or alliances among competitors could emerge
and rapidly acquire significant market share. Increased competition may result
in price reductions, reduced gross margins and loss of market share.
We believe that our ability to compete successfully depends on a number
of factors, both within and outside of our control. These factors include:
o the price, performance and quality of our and our competitors'
products;
o the timing and success of new product and feature introductions
by us, our customers and our competitors;
o the emergence of new standards in the optical communications
industry, the development of technical innovations;
o the availability of raw materials;
o the efficiency of production;
o the rate at which our customers design our products into their
products, the number and nature of our competitors in a given
market;
o the assertion of intellectual property rights; and
o general market and economic conditions.
SALES, MARKETING AND TECHNICAL SUPPORT
We are party to an agreement with Molex that reserves some of our first
year of production for Molex . See "Business - Material Agreements." The
agreement provides us with access to Molex's global distribution network. This
reliance on Molex poses an operating risk to us. In the event that this
relationship changes , we could be forced to sell all of our products directly .
We expect to product 500 packaged chips per day starting in 2001 and 1,000 per
day starting in 2002. Molex is committed to purchase 400 packaged chips per
month for the first 12 months and has the option to purchase 50% of our
production.
We presently promote our developing product line in trade journals to
generate advance interest. Over the next 12 months, we will hire additional
internal marketing and sales personnel to assist with our efforts. We plan to
develop an international network that would include offices in North America,
Europe and Asia-Pacific.
We believe that providing our clients with comprehensive product service
and support is critical to maintaining a competitive position in the optical
communications market. Our practice will be to work closely with our customers
to monitor the performance of our product designs and to provide application
design support . We will also provide a valuable technical resource for
consulting on photonic component trends and implementations. Local field support
will be provided in person or by telephone.
We intend to provide support at crucial stages of product development.
We may provide software simulation models of components to allow customers to
simulate the performance of our products in their system . In the future, we may
also offer modules to enable customers to evaluate our devices without
significant development effort on their part, thereby facilitating rapid
time-to-market. We believe that close contact with customers will allow us to
tailor our products to the market . Understanding our customers' particular
problem will enable us to design and develop solutions in our next generation of
products.
HISTORY OF LUMENON
Our principal place of business is located in the Montreal suburb of
Ville Saint Laurent. We were incorporated in the State of Delaware in February
1996 under the name of WWV Development, Inc. In July 1998, under an acquisition
plan, we acquired all of the issued and outstanding shares of LILT Canada, Inc.,
a Canadian corporation ("LILT") founded in March 1998 by Professor S. Iraj
Najafi of the Ecole Polytechnique, Montreal (an engineering school), and
Professor Mark P. Andrews of McGill University, Montreal. Upon consummation of
the acquisition plan, we changed our name from WWV Development, Inc. to Lumenon
Innovative Lightwave Technology, Inc. As consideration for the acquisition, we
issued 12,200,000 shares of common stock to the shareholders of LILT, which
resulted in a change in control. Under applicable accounting rules and policies,
LILT is deemed the acquiring corporation and the financial information contained
in this prospectus is that of LILT, as consolidated with Lumenon.
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<PAGE>
PROPERTIES
Our corporate and technical headquarters are located in a facility of
approximately 53,000 square feet. Approximately 64% of the space is occupied by
our cleanroom and manufacturing areas and the remainder by our offices.
The lease for our Ville St. Laurent facility is for a period of twelve
years ending in July 31 2012 with annual rent in the amount of CDN$10.50 net per
square foot, or CDN$561,103 in the aggregate for each of the first six years.
After the first six years, the annual rent will increase to CDN$630,789. We pay
the operating expenses for the facility, which are estimated to be CDN$4.20 per
square foot for the first year or CDN$224,396 in the aggregate. We have the
option to renew the lease for an additional period of five years at a rate equal
to the then current market price for comparable space. The construction of the
building was completed in July 2000. We are currently completing the internal
construction of the production facility, including the clean rooms and
associated laboratories and installing manufacturing equipment. We anticipate
that the production facility should be operational at the rate of 500 packaged
chips per day in 2001. We expect to add additional equipment and staff to this
facility to bring this facility to its full capacity of 1,000 units per day by
2002.
Our Dorval facility has an existing capacity of 20 units per day and
will be used to manufacture products until the Ville Saint-Laurent facility is
operational. Once the Ville Saint-Laurent facility is operational, we intend to
reconfigure the Dorval facility as an R&D facility with an ancillary production
capability. The lease for the Dorval facility is for a period of five years
ending in January 2004, with annual rent in the amount of CDN$4.59 net per
square foot, or CDN$32,814 in the aggregate. We pay the operating expenses which
we estimate to be CDN$1.87 per square foot per year and CDN$13,369 in the
aggregate. We have the option to renew the lease for an additional period of
five years at a rate equal to the then current market price for comparable space
in the same building. As of June 30, 2000, we had spent CDN$425,523 on leasehold
improvements to construct and equip the Dorval facility.
We believe that the Ville Saint-Laurent and Dorval facilities will be
adequate for our business as proposed to be conducted until at least the spring
of 2002.
LEGAL PROCEEDINGS
We are not currently involved in any material legal proceedings. From
time to time, however, we may be subject to claims and lawsuits arising in the
normal course of business.
MANAGEMENT
Our directors and executive officers and their positions with us are as
follows:
Name Age Position
---- --- --------
Dr. S. Iraj Najafi 46 Director, Chief Executive Officer and
President
Dr. Mark P. Andrews 48 Director, Vice President, Chief
Technical Officer and Secretary
Dr. Anthony L. Moretti 48 Director
Denis N. Beaudry 56 Director
Pierre-Paul Allard 40 Director
Guy Brunet 48 Director
Gilles Marcotte 61 Director
Pierre-Andre Roy 59 Director
Dr. Chia-Yen Li 38 Chief Operating Officer
Vincent Belanger 33 Vice President Finance and Chief
Financial Officer
Reginald J.N. Ross 39 Vice President of Corporate Development
Felice Philip Meffe 46 Vice President of Business Development
and Marketing
33
<PAGE>
Dr. Iraj Najafi joined us in July 1998 as Director, President and Chief
Executive Officer. He was a co-founder of LILT Canada Inc., a wholly-owned
subsidiary of Lumenon in 1998, with Dr. Mark Andrews. Dr. Najafi received B.Sc
and M.Sc. Degrees in physics from Shiraz University and a Ph.D. in Physics from
the Ecole Centrale in Paris. After two years of postdoctoral research at the
University of Florida, Gainesville, Dr. Najafi joined the Department of
Electrical Engineering at the Ecole Polytechnique in Montreal in 1986, as a
researcher and subsequently as professor, where he developed an international
reputation as a pioneer in glass integrated optics. He also founded the
Photonics Research Group at the Ecole Polytechnique. Dr. Najafi has co-authored
more than 300 articles, patents, book chapters and books and taken a leadership
role in over 25 international conferences. He has been a guest editor for
Applied Optics and associate editor of Optical Engineering. Dr. Najafi is a
member of the International Society for Optical Engineering (SPIE) and has been
elected a Fellow of the SPIE. Dr. Najafi is on leave from Ecole Polytechnique
until January 2001. He may extend his leave for an additional two years.
Dr. Mark P. Andrews joined us in July 1998 as Director, Vice President,
Chief Technical Officer and Secretary. He was a co-founder of LILT Canada Inc.
Dr. Andrews received his Ph.D. in physical inorganic chemistry from the
University of Toronto. In 1984, Dr. Andrews joined the staff of AT&T Bell
Laboratories (now Lucent Technologies) as a Principal Investigator in the
Materials Research Division where his research focused on the study of
non-linear optical properties of polymer composites. In 1990, he joined the
Department of Chemistry at McGill University, where he developed new photonic
glasses and polymers. Dr. Andrews has been an Assistant Professor and currently
is an Associate Professor at McGill University, from which he took a leave of
absence from commencing February 1, 2000 in order to devote all of his time to
the growth of Lumenon. He is a member of the Materials Research Society and the
International Society for Optical Engineers (SPIE).
Dr. Anthony L. Moretti became a Director in December 1999. Dr. Moretti
has been employed in various executive capacities with Molex Fiber Optics Inc.,
Chicago, Illinois, since 1997. He is currently Director-Optoelectronic
Development, Molex Fiber Optics Inc, a subsidiary of Molex. Prior to working at
Molex, Dr. Moretti worked as an independent consultant for high tech companies
from 1994 to 1997 and prior thereto was the Technical Director of Amoco
Corporation's research laboratory, which designed and developed optical AWG
devices.
Mr. Denis N. Beaudry became a Director in June 1999. Mr. Beaudry is
President of Polyvalor, Montreal, Quebec, Canada, a limited partnership formed
by the Ecole Polytechnique for the purpose of commercializing its intellectual
property. Since 1984, he has occupied the position of Director of the Centre de
Developpement Technologique of the Ecole Polytechnique whose sphere of
activities includes technology transfer, licensing of technology and software,
joint creation with private industry of laboratories and research centers,
strategic alliances, research partnerships, industrial chairs and the emergence
of high technology enterprises. In 1998, he joined Polyvalor as President and
General Manager. His role consists of enhancing the value of research results
for commercial use by means of start-up of high-tech companies in which
Polyvalor holds a participation or interest. Mr. Beaudry was President of the
Quebec Association of University Research Directors in 1992, and is at present a
member of the Board of Directors of the Centre des Technologies Textiles, the
College Rosemont, the Corporation de Financement de l'Institut de Cardiologie de
Montreal, the Centre de Technologies du Gaz Naturel, the Corporation Commerciale
de Materiaux Composites, the Centre de Developpement Rapide de Produits et de
Procedes, and the firms Sinlab Inc., BioSyntech Inc., a biopharmaceutical
company, Phytobiotech Inc., Polyplan Inc., Odotech Inc. and COESI Inc.
Mr. Pierre-Paul Allard became a Director in December 1999. Mr. Allard is
General Manager of Cisco Systems, Canada, a subsidiary of Cisco Systems Inc., an
Internet infrastructure firm. Mr. Allard has been employed in various executive
capacities with Cisco since 1993.
Dr. Chia-Yen Li joined us in August 1999 as Chief Operating Officer. Dr.
Li received his Ph.D. in Materials Science and Engineering from the University
of California in Los Angeles (UCLA). Dr. Li has 10 years of experience in the
development of sol-gel materials for photonics. From August 1994 to August 1995,
Dr. Li was a Visiting Scholar at the Optical Services Center of the University
of Arizona where he conducted research on integrated optical devices and
materials on a short-term basis. From August 1995 to July 1997, Dr. Li was a
Staff Scientist at NZ Applied Technologies, researching federally funded
projects relating to photonics materials and devices. From July 1997 until
joining us, Dr. Li was a Senior Scientist at MicroTouch Systems Incorporated,
which is a supplier of touch and pen sensitive input systems, including
touchscreens and electronic whiteboards. Dr. Li was in charge of designing and
implementing manufacturing processes on behalf of MicroTouch.
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<PAGE>
Mr. Vincent Belanger joined us in June 1999 as Chief Financial Officer
and Treasurer. He was elected to the additional office of Vice President Finance
in August 2000. Mr. Belanger is a chartered accountant. From 1989 until
September 1998, Mr. Belanger was employed in the corporate finance department of
KPMG LLP, one of the world's leading professional advisory firms, in Montreal.
From September 1998 until joining Lumenon, Mr. Belanger was employed as Vice
President Finances and Corporate Controller of Viper International Holdings
Ltd., a holding company established for the purpose of making acquisitions.
Mr. Reginald Ross joined us in November 1999 as the Vice President of
Corporate Development and Chief of Strategic Operations. Mr. Ross has a B.Eng
(Electrical) from Royal Military College of Canada and is both a Professional
Engineer (Ontario) and a Certified Project Management Professional. Mr. Ross has
a history of over 20 years in information technology project and program
management both within the industry and the Department of National Defense of
Canada. From September 1999 through December 1999, Mr. Ross was an independent
consultant assisting companies in the information technology industry, focusing
on optics and photonics. From June 1999 to September 1999, he was Chief
Executive Officer and President of Fiberview Technologies Limited, a company
producing optical systems devices; from August 1998 to May 1999, Mr. Ross was
Program Manager for SpaceBridge Networks Corporation, a company providing
broadband satellite communications systems; and prior to August 1998, Mr. Ross
was a communications officer in the Department of National Defense retiring at
the rank of Major. Through his recent experience as a consultant and executive,
Mr. Ross also brings considerable expertise in strategic analysis, planning and
executive management within the high-tech start-up environment.
Mr. Pierre-Andre Roy became a Director in May 2000. Mr. Roy studied
Administration and Accounting at Laval University (Quebec City) and at Ecole des
Hautes Etudes Commerciales (Montreal). Mr. Roy joined Bombardier Inc. in 1980 as
Vice President of Finance and Administration in its Mass Transit Division. In
1987, he became Controller for Bombardier's Transportation Equipment Group and
then became Controller for Bombardier Inc. In 1989, Mr. Roy joined Bombardier's
Aerospace Group as Vice President of Finance where he was also responsible for
Information Technologies and Sales Financing activities. In 1992, he was
promoted to President and General Manager of the Aerospace Group's Amphibious
Aircraft Division. In 1993, Mr. Roy assumed the role of President and COO for
Bombardier Capital. From 1995 to 1996, he served in a dual role as President of
Bombardier Capital and Treasurer of the holding corporation, Bombardier Inc. Mr.
Roy relinquished his position as Treasurer in May 1996 to focus on developing
Bombardier Capital business interests. He retired in February 2000.
Mr. Guy Brunet became a Director in March 2000. Mr. Brunet has been an
Investment Advisor for RBC Dominion Securities Wood Gundy and Richardson
Greenshields, investment banking firms, for over twenty years.
Mr. Gilles Marcotte became a Director in March 2000. He has a MSc.
degree in Commerce at the University of Sherbrooke and is a Fellow Chartered
Accountant. He was a partner at KPMG and its predecessor firms since 1979 and
retired in 1998 at the age of 58. Prior to retirement, he was Partner-in-charge
of KPMG's Quebec City office and has been on the Board of Directors of KPMG
Canada. Mr. Marcotte sits on the Board of Directors of a number of companies and
is President of the Quebec Symphony Orchestra and Caisse Populaire Desjardins of
Charlesbourg. Mr. Marcotte also chairs Lumenon's Audit Committee.
Dr. Moretti is the nominee of Molex which, under the Molex agreements,
has the right to appoint one nominee to the board of directors. Mr. Beaudry is
the nominee of Polyvalor and McGill University, which jointly have the right to
appoint one nominee to the Board of Directors.
Mr. Felice Philip Meffe joined us in May 2000 as Vice President of
Business Development and Marketing. He has B.Com and MBA degrees from McGill
University and 20years experience in international sales and marketing,
strategic planning, business development, operation analysis, financial analysis
and organization effectiveness. Mr. Meffe worked 18 years in Nortel Networks in
different capacities where he was International Accounts Director from 1996 to
1999. In 1998, Mr. Meffe was awarded the President Award of Nortel Networks for
Sales and Marketing. From 1999 to 2000, Mr. Meffe was Head of Strategic Planning
and Business Development in Astec, a subsidiary of Emerson Electric Co.
Commencing with the 1999 annual meeting of stockholders, directors were
divided into three classes, with the initial term of office of:
o Class I to expire at the 2000 annual meeting of stockholders;
o Class II to expire at the 2001 annual meeting of stockholders;
and
o Class III to expire at the 2002 annual meeting of stockholders.
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<PAGE>
Commencing with the 2000 annual meeting of stockholders, directors will
be elected for a term of office to expire at the third succeeding annual meeting
of stockholders after their election. At the 1999 annual meeting of
stockholders, Dr. Najafi and Mr. Allard were elected as Class I directors, Mr.
Beaudry was elected as a Class II director and Dr. Andrews and Dr. Moretti were
elected as Class III directors. Messrs. Roy, Brunet and Marcotte, each of whom
was elected by the Board of Directors subsequent to the 1999 Annual Meeting of
stockholders, were designated as a Class I director, a Class II director and a
Class III director, respectively.
SUMMARY COMPENSATION TABLE
The following table sets forth, for the periods indicated, all
compensation awarded to, earned by or paid to our chief executive officer. None
of the other executive officers received compensation in excess of US$100,000 in
2000.
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
Name and Principal Position Year(1) Salary(2) Bonus # of Options
--------------------------- ------- --------- ----- ------------
<S> <C> <C> <C> <C>
S. Iraj Najafi 2000 US$121,736 -- --
Chief Executive Officer and 1999(3) US$36,798 -- 200,000
President 1998 US$31,311 -- --
</TABLE>
---------------------
(1) We commenced operations in 1998.
(2) Our executive officers routinely receive other benefits, the amounts of
which are customary in our industry. We have concluded, after reasonable
inquiry, that the aggregate amounts of these benefits during each of the
periods reflected in the table above did not exceed the lesser of
US$50,000 or 10% of the compensation set forth above in respect of the
period.
(3) Represents solely the six-month period ended June 30, 1999.
COMPENSATION OF DIRECTORS
No remuneration or directors fees were paid to our directors during the
year ended June 30, 2000, with the exception of reimbursement of expenses.
During the fiscal year ended June 30, 2000, non-employee directors were granted
the following options to purchase common stock:
Guy Brunet was granted an option to acquire 50,000 shares at a price of
US$28.00 per share vesting over two years in equal tranches of 25,000,
exercisable for a period of two years after their vesting dates of March
28, 2001 and March 28, 2002, respectively.
Gilles Marcotte was granted an option to acquire 50,000 shares at a
price of US$28.00 per share vesting over two years in equal tranches of
25,000, exercisable for a period of two years after their vesting dates
of March 28, 2001 and March 28, 2002, respectively.
The board of directors will determine the remuneration of the directors
and officers during the current and subsequent fiscal years.
EMPLOYMENT AGREEMENTS
Dr. Mark P. Andrews is employed by us as Vice President and Chief
Technical Officer pursuant to an employment agreement entered into July 7, 2000
and effective January 1, 1999 for a term of three years. The agreement
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<PAGE>
provides for an initial base salary of CDN$125,000 (US$84,539) annually. On July
21, 2000, Dr. Andrews' base annual salary was increased to CDN$300,000
(US$202,893). We also granted Dr. Andrews an option to acquire up to 200,000
shares of common stock. Throughout the employment period and for a period of
three years thereafter, the agreement restricts Dr. Andrews ' ability to engage
in activities competitive with those of ours. In addition, throughout the
employment period and for a period of two years thereafter, Dr. Andrews has
agreed that he will not solicit any person employed by us to leave our employ,
or employ or solicit for employment any person who is employed by us. The
agreement may be terminated by us (i) in the event of the bankruptcy,
liquidation, or dissolution of Lumenon, (ii) if he commits certain acts
constituting cause or (iii) if he is in material breach of the agreement. Dr.
Andrews may terminate the employment agreement upon three months' prior written
notice to us.
Dr. Chia-Yen Li is employed by us as Chief Operating Officer pursuant to
an employment agreement effective August 1, 1999 for a term of five years. The
agreement provides for an initial base salary of CDN$125,000 (US$84,539)
annually. We also granted Dr. Li an option to acquire up to 250,000 shares of
common stock. Throughout the employment period and for a period of three years
thereafter, the agreement restricts Dr. Li's ability to engage in activities
competitive with those of ours. In addition, throughout the employment period
and for a period of two years thereafter, Dr. Li has agreed that he will not
solicit any person employed by us to leave our employ, or employ or solicit for
employment any person who is employed by us. The agreement may be terminated by
us (i) in the event of the bankruptcy, liquidation, or dissolution of Lumenon,
(ii) if Dr. Li commits certain acts constituting cause or (iii) if he is in
material breach of the agreement. Dr. Li may terminate the employment agreement
upon three months' prior written notice to us.
Vincent Belanger, CA is employed by us as Vice-President Finance, Chief
Financial Officer and Treasurer pursuant to an employment agreement effective
June 14, 1999 for a term of five years. The agreement provides for a base salary
of CDN$150,000 (US$101,447) annually. We also granted Mr. Belanger an option to
acquire up to 300,000 shares of common stock. Throughout the employment period
and for a period of three years thereafter, the agreement restricts Mr.
Belanger's ability to engage in activities competitive with those of ours. In
addition, throughout the employment period and for a period of two years
thereafter, Mr. Belanger has agreed that he will not solicit any person employed
by us to leave our employ, or employ or solicit for employment any person who is
employed by us. The agreement may be terminated by us (i) in the event of the
bankruptcy, liquidation, or dissolution of Lumenon, (ii) if Mr. Belanger commits
certain acts constituting cause or (iii) if he is in material breach of the
agreement. Mr. Belanger may terminate the employment agreement upon one month's
prior written notice to us.
Reginald J.N. Ross is employed by us as the Vice President of Corporate
Development and Chief of Strategic Operations pursuant to an employment
agreement effective December 1, 1999 for a term of five years. The agreement
provides for an initial base salary of CDN$125,000 (US$84,539) annually. We also
granted Mr. Ross an option to acquire up to 300,000 shares of common stock.
Throughout the employment period and for a period of three years thereafter, the
agreement restricts Mr. Ross' ability to engage in activities competitive with
those of ours. In addition, throughout the employment period and for a period of
two years thereafter, Mr. Ross has agreed that he will not solicit any person
employed by us to leave our employ, or employ or solicit for employment any
person who is employed by us. The agreement may be terminated by us (i) in the
event of the bankruptcy, liquidation, or dissolution of Lumenon, (ii) if he
commits certain acts constituting cause or (iii) if he is in material breach of
the agreement. Mr. Ross may terminate the employment agreement upon one month's
prior written notice to us.
Felice Philip Meffe is employed by us as Vice President Marketing and
Business Development pursuant to an employment agreement effective June 9, 2000
for an indeterminate term. The agreement provides for an initial base salary of
CDN$125,000 (US$84,539) annually. We also granted Mr. Meffe an option to acquire
up to 250,000 shares of common stock. Throughout the employment period and for a
period of one year thereafter, the agreement restricts Mr. Meffe's ability to
engage in activities competitive with those of ours. In addition, throughout the
employment period and for a period of one year thereafter, Mr. Meffe has agreed
that he will not solicit any person employed by us to leave our employ, or
employ or solicit for employment any person who is employed by us. The agreement
may be terminated by us (i) in the event of the bankruptcy, liquidation, or
dissolution of Lumenon, (ii) if Mr. Meffe commits certain acts constituting
cause or (iii) if he is in material breach of the agreement. Mr. Meffe may
terminate the employment agreement upon one month prior written notice to us.
STOCK OPTIONS
We have created a stock option plan for our key employees, directors ,
officers and consultants. The plan is administered by our board of directors.
The board may from time to time designate individuals to whom options may be
granted and the number of shares optioned to each. The number of shares optioned
to any one individual
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<PAGE>
may not exceed 5% of the total of our outstanding shares. The option price is
fixed by the board when the option is granted and cannot involve a discount to
the market price at the time the option is granted. The period during which an
option is exercisable may not exceed 10 years from the date the option is
granted. Options may not be transferred and expire within a fixed period from
the termination of employment or death of the beneficiary. In the event of basic
changes in Lumenon, including a reorganization, merger tender offer , in the
discretion of the board, each option may become fully and immediately
exercisable. Options enabling their beneficiaries to acquire a total of
3,590,150 shares of common stock, at a weighted average exercise price of
US$15.20 per share, were outstanding under the plan as of October 31, 2001. The
number of shares of common stock as to which options may be granted under the
plan has been increased from 2,500,000 to 6,000,000, subject to approval by
stockholders at the 2000 annual meeting of stockholders.
We have never granted any stock appreciation rights. No stock options
were granted to our chief executive officer during the fiscal year ended June
30, 2000.
OPTION EXERCISED AND OPTION VALUES
The following table provides information related to options exercised by
our chief executive officer and the number of and value of options held by him
on June 30, 2000.
<TABLE>
<CAPTION>
Securities Aggregate Value of Unexercised in the
Acquired Value Realized Unexercised Options as at money options as at
Name On Exercise ($) June 30, 2000 (#) June 30, 2000 ($)
---- ----------- --------------- ----------------- ----------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
S. Iraj Najafi 200,000 US$5,100,000 _ _ _ _
</TABLE>
OTHER COMPENSATION PLANS
We have no pension plan or other compensation plans for our executive
officers or directors.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Our voting securities outstanding as of November 8, 2000 consisted of
36,069,153 shares of common stock. The following table sets forth information
concerning ownership of common stock as of November 8, 2000 by
o each director;
o each executive officer;
o all directors and executive officers as a group; and
o each person who, to our the knowledge, owned beneficially more
than 5% of the common stock.
Unless otherwise indicated, the address of each holder is in care of
Lumenon, 8851 Transcanada Highway, Ville Saint-Laurent, Quebec, Canada H4S 1Z6.
Except as otherwise indicated, and subject to applicable community property
laws, each person has sole investment and voting power with respect to the
shares shown. Ownership information is based upon information furnished by the
respective holders and contained in our records.
<TABLE>
<CAPTION>
Number of Shares
of Common Stock
Directors, Executive Beneficially
Officers and 5% Stockholders Owned (1) Percentage
------------------------------ -------------------------- ----------
<S> <C> <C>
Dr. S. Iraj Najafi................................. 5,037,500(2) 14.1%
Najafi Holding Inc............................... 5,037,500(2) 14.1%
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Dr. Mark P. Andrews................................ 4,735,100(3) 13.2%
Andrewma Holding Inc............................... 4,687,500(3) 13.1%
Anthony L. Moretti(4).............................. 25,000(5) (6)
Molex Incorporated(4).............................. 10,466,667 29.3%
Denis N. Beaudry(7).............................. 50,000(7) (6)
Dr. Chia-Yen Li.................................... 50,000(8) (6)
Vincent Belanger................................... 23,650(9) (6)
Reginald J.N. Ross................................. 100,000(10) (6)
Guy Brunet......................................... --(11) --
Gilles Marcotte.................................... 5,000(11)(12) (6)
Pierre-Paul Allard................................. 25,000(13) (6)
Pierre-Andre Roy................................... -(11) --
Felice Philip Meffe................................ -(14) --
All directors and executive officers as a group.... 10,051,250(15) 27.9%
</TABLE>
------------------------------------
(1) A person is deemed to be the beneficial owner of voting securities that
can be acquired by such person within 60 days after November 8, 2000
upon the exercise or conversion of options, warrants or convertible
securities. Each beneficial owner's percentage ownership is determined
by assuming that options, warrants and convertible securities that are
held by such person (but not those held by any other person) and that
are exercisable or convertible within 60 days after November 8, 2000
have been exercised or converted.
(2) Represents 5,037,500 shares owned by Najafi Holding Inc., of which Dr.
Najafi is the sole stockholder.
(3) Includes 4,687,500 shares owned by Andrewma Holdings Inc., of which Dr.
Andrews is the sole stockholder.
(4) The address of Molex and Dr. Moretti is 2222 Wellington Court, Lisle,
Illinois 60532.
(5) Dr. Moretti is the representative of Molex Incorporated on our Board of
Directors. The shares reflected in the table above do not include the
shares beneficially owned by Molex, as to which Dr. Moretti disclaims
beneficial ownership. The shares reflected in such table represent
25,000 shares of common stock issuable upon exercise of an option held
by Dr. Moretti. Please see "Certain Relationships and Related
Transactions" for a description of the agreements under which Molex is
entitled to designate a member of our board of directors.
(6) Less than 1%.
(7) Mr. Beaudry is the representative of Polyvalor and McGill University on
our board of directors. The shares reflected in the table above do not
include the shares beneficially owned by Polyvalor and McGill, as to
which Mr. Beaudry disclaims beneficial ownership. The shares reflected
in such table represent 50,000 shares of common stock issuable upon
exercise of options held by Mr. Beaudry. The address of Mr. Beaudry is
Polyvalor Inc., 3744 Jean-Brillant Street, Suite 6332, Montreal,
Quebec, H3T 1P1. Please see "Certain Relationships and Related
Transactions" for a description of the agreements under which Polyvalor
is entitled to designate a member of our board of directors.
(8) Includes 25,000 shares of common stock issuable upon exercise of options
held by Dr. Li. Does not include 200,000 shares issuable upon exercise
of additional options that are not currently exercisable or exercisable
within 60 days after November 8, 2000.
(9) Represents 23,650 shares of common stock issuable upon exercise of
options held by Mr. Belanger. Does not include 240,000 shares issuable
upon exercise of additional options that are not currently exercisable
or exercisable within 60 days after November 8, 2000.
39
<PAGE>
(10) Includes 50,000 shares of common stock issuable upon exercise of options
held by Mr. Ross. Does not include 200,000 shares issuable upon exercise
of additional options that are not currently exercisable or exercisable
within 60 days after November 8, 2000.
(11) Does not include 50,000 shares of common stock issuable upon exercise of
options held by each of Messrs. Brunet, Marcotte and Roy that are not
currently exercisable or exercisable within 60 days after November 8,
2000. The address of Mr. Brunet is Canaccord Capital Corp., 1010
Sherbrooke Street West, 10th Floor, Montreal, Quebec, H3A 2R7. The
address of Mr. Marcotte is 500 de Chantelle Street, Charlesbourg,
Quebec, G1G 2Z2.
(12) Includes 2,000 shares of common stock owned by Mr. Marcotte's wife and
2,000 shares of common stock owned by Gem Len Inc., a company which Mr.
Marcotte controls.
(13) Does not include 25,000 shares of common stock issuable upon exercise of
options held by Mr. Allard that are not currently exercisable or
exercisable within 60 days after November 8, 2000. The address of Mr.
Allard is Cisco Systems Canada Co., Bay Wellington Tower, BCE Place, 181
Baystreet, Suite 3440, Toronto, Ontario M5J 2T3.
(14) Does not include 200,000 shares issuable upon exercise of additional
options that are not currently exercisable or exercisable within 60 days
after November 8, 2000.
(15) Includes an aggregate of 173,650 shares of Common Stock issuable upon
exercise of options.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On May 19 and June 21, 1999, we entered into several agreements with
Molex. The Molex agreements include a teaming agreement, a stock purchase
agreement, a stock restriction agreement and a registration rights agreement.
The teaming agreement was amended in March 2000. Under the teaming agreement, as
amended, we agreed with Molex to jointly develop DWDM products related to the
DWDM market and other photonics markets. Under the stock purchase agreement,
Molex purchased 3,000,000 shares of common stock at a price of US$0.50 per share
in two stages. We also issued to Molex a warrant to purchase 1,666,667
additional shares of common stock at a price of US$0.90 per share, which was
exercised in November 1999. In addition, we issued the services warrant, which
was exercised in full during the past fiscal year . Under the stock restriction
agreement, (a) the consent of Molex is required for extraordinary actions
relating to our governance and our operations and (b) Najafi Holdings Inc. and
Andrewma Holdings Inc. have agreed not to sell their respective shares of common
stock to a competitor of Molex without Molex's prior consent. Dr. Moretti, an
officer of Molex Fiber Optics Inc., is a director of Lumenon. We had no
affiliation with Molex before the Molex agreements.
We have has entered into a license agreement with Polyvalor, a limited
partnership, Polyvalor Inc. and McGill University (together, Polyvalor and
McGill University are referred to as the licensor) pursuant to which we acquired
the right through October 2017 to produce, sell, distribute and promote products
derived from using patents and know-how of the licensor. Using a licensed
sol-gel process of the licensor, we are designing developing integrated optical
devices for DWDM and plastic optical fiber devices for the telecommunications
and data communications markets. We will pay a royalty of 5% on our gross sales,
up to a maximum of CDN$3,500,000 (US$2,367,104) over the term of the license
agreement. Additionally, we issued 750,000 shares of common stock to each of
Polyvalor and McGill University. Mr. Beaudry, an officer of Polyvalor, is a
director of Lumenon. We had no affiliation with the licensor prior to the
license agreement.
SELLING STOCKHOLDERS
The following table sets forth the names of the selling stockholders,
the number of shares of common stock beneficially owned by each selling
stockholder as of the date of this prospectus, the number of shares of common
stock to be sold by each of them pursuant to this prospectus and the percentage
of the outstanding common stock to be held by each of them after this offering.
Pursuant to a registration rights agreement between us and Capital Ventures
International ("CVI") and Castle Creek Technology Partners LLC ("Castle Creek"),
we have agreed initially to register 8,800,000 shares of common stock issuable
upon conversion of the outstanding notes and exercise of the outstanding
warrants we issued to them in July 2000. Accordingly, the 8,800,000 number
reflects the aggregate number of shares being offered by CVI and Castle Creek
pursuant to this prospectus. Because the number of shares issuable upon
conversion of the notes will depend upon the price of the common stock in the
future, the actual number of shares issued may be more or less than 8,800,000.
In addition, the number of shares owned by CVI and Castle Creek is based upon a
determination of beneficial ownership under Section 13(d) of the Securities
Exchange Act, which results in a number of shares lower than the total number we
have agreed to register. Beneficial ownership includes shares of outstanding
common stock and shares of common stock that a person has a right to acquire
within 60 days after the date of this prospectus. The percentage of common stock
outstanding after this offering is based on 36,069,153 shares of common stock
issued and outstanding as of November 8, 2000. None of the selling stockholders
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<PAGE>
is obligated to sell all or any portion of the shares covered by this
prospectus, or to sell any of the shares immediately under this prospectus.
Because the selling stockholders may sell all or part of their shares, no
estimate can be given as to the number of shares that will be held by any
selling stockholder upon termination of this offering.
<TABLE>
<CAPTION>
Prior to Offering After Offering
--------------------------- -------------------------
Number of
Number of Shares Shares
Beneficially Number of Shares Beneficially Percentage
Name of Selling Stockholder Owned Offered Owned(1) of Class
--------------------------- ----- ------- -------- --------
<S> <C> <C> <C> <C>
Molex Incorporated(2) 10,314,667 2,000,000 8,314,667 23.05%
Capital Ventures International(3) 1,188,119(4) 5,858,286(5) 0 *
Castle Creek Technology Partners 596,609(4) 2,941,714(5) 0 *
LLC(3)
</TABLE>
-----------
* Less than 1%.
(1) Assumes the sale of all shares owned by the selling stockholders covered
by this prospectus. Based upon the current market price of the common
stock and the number of shares that CVI and Castle Creek beneficially
own, Castle Creek and CVI would not own any shares after completion of
this offering. However, the actual number of shares issuable upon
conversion of their notes will increase if the price of the common stock
declines and therefore the actual number cannot be determined at this
time. Consequently, it is possible that CVI and Castle Creek could
beneficially own additional shares after this offering.
(2) Under the Molex agreements, Molex has the right to designate one member
to our board of directors.
Heights Capital Management, Inc., as CVI's authorized agent, has
discretionary authority to vote and dispose of the shares held by CVI
and may be deemed to be the beneficial owner of those shares. Castle
Creek Partners, L.L.C., an Illinois limited liability company, as Castle
Creek's authorized agent, has discretionary authority to vote and
dispose of the shares held by Castle Creek and may be deemed to be the
beneficial owner of those shares.
(3) Neither CVI nor Castle Creek has, or within the past three years has
had, any position, office or other material relationship with Lumenon.
(4) Consists of shares of common stock issuable upon conversion of
outstanding convertible notes. The actual number of shares of common
stock issuable upon conversion of the notes will equal the aggregate
principal amount of the notes being converted, plus accrued interest,
divided by the lower of US$25.00 (subject to adjustment ) and the
average closing bid prices of the common stock for the five consecutive
trading days preceding conversion, but not less than US$7.00 except in
limited circumstances. The amounts listed in the table assume a
conversion price of US$19.762 for purposes of beneficial ownership,
which is the average of the closing bid prices of the common stock for
the five consecutive trading days preceding August 31, 2000. On October
16, 2000, notes for an aggregate principal amount of CDN$10,549,000
(US$7,000,000) were converted into 616,414 shares of common stock. Does
not include shares issuable upon exercise of outstanding warrants.
Because the warrants will not become exercisable until January 2002, the
shares issuable upon their exercise are not beneficially owned by the
selling stockholders as of the date of this prospectus. For a complete
description of terms of the notes and the warrants, see the form of note
and the form of warrant included as Exhibits 4.4 and 4.5, respectively,
to this registration statement.
Except under limited circumstances, no holder of the notes or the
warrants is entitled to convert any portion of the notes into, or
exercise any portion of the warrants for, shares of common stock or to
dispose of any portion of the notes or warrants to the extent that the
right to effect the conversion, exercise or disposition would result in
the holder or any or its affiliates beneficially owning more than 4.99%
of the outstanding shares of common stock. Therefore, the number of
shares that CVI or Castle Creek may sell pursuant to this prospectus may
41
<PAGE>
exceed the number of shares of common stock either of them would
otherwise beneficially own as determined pursuant to Section 13(d) of
the Securities Exchange Act.
(5) Represents the pro rata allocation between CVI and Castle Creek of
8,800,000 shares of common stock, which we are registering pursuant to
the registration rights agreement included as Exhibit 10.7 to the
registration statement of which this prospectus forms a part. Because
the shares offered by this prospectus include the shares issuable upon
exercise of the warrants (which are not exercisable until January 2002
or earlier upon an event of default under the notes or other of our
obligations to the purchasers), as well as additional shares that may be
issued upon conversion of the notes, the number of offered shares
exceeds the number of shares beneficially owned, which, as noted above,
consists of outstanding shares and shares that may be acquired within 60
days.
Pursuant to Rule 416 of the Securities Act, the registration statement
is also deemed to cover common stock issued with respect to the notes
and warrants as a result of stock splits, stock dividends and
anti-dilution provisions.
DESCRIPTION OF CAPITAL STOCK
The following is a summary of the material provisions of our capital
stock and the relevant provisions of our certificate of incorporation and the
bylaws that are referenced as exhibits to this registration statement. This
summary is subject to the provisions of applicable law.
AUTHORIZED AND OUTSTANDING CAPITAL STOCK
We have authorized capital stock consisting of 100,000,000 shares of
common stock, US$.001 par value, of which 36,069,153 shares were issued and
outstanding as of November 8, 2000, and 5,000,000 shares of preferred stock,
US$.001 par value, of which no shares have been issued.
COMMON STOCK
Holders of our common stock are entitled to one vote per share on all
matters to be voted upon by stockholders. The shares of common stock have no
preemptive or conversion rights, no redemption or sinking fund provisions and
are not liable for further call or assessment. The outstanding shares of common
stock are fully paid and non-assessable. Subject to the rights of the holders of
preferred stock from time to time outstanding, the holders of common stock are
entitled to receive ratably the dividends, if any, declared from time to time by
our board of directors . Dividends may be paid in cash, property, or shares of
common stock. We have never declared or paid any dividends on our common stock
and presently anticipate that all future earnings, if any, will be retained for
the development of our business. The payment of future dividends will be at the
discretion of our board of directors and will depend upon, among other things,
our future earnings, capital requirements, the financial condition, and general
business conditions.
PREFERRED STOCK
Our board of directors is expressly authorized to provide for the
issuance of shares of our preferred stock, in one or more series, and to fix for
each series , voting powers, designations, preferences , special rights and
qualifications, limitations or restrictions permitted by Law . Except as
provided in the Molex agreements, no vote of the shareholders will be required
in connection with the designation or the issuance of preferred stock. No shares
of preferred stock are currently outstanding. However, any future issuance of
preferred stock could adversely affect the rights of the holders of common
stock, and therefore reduce the value of our common stock. In particular,
specific rights granted to future holders of preferred stock could be used to
restrict our ability to merge with or sell our assets to a third-party, thereby
preserving control of Lumenon by its present owners.
WARRANTS AND OPTIONS
As of November 8, 2000, there were warrants outstanding to purchase
5,757,811 shares of our common stock. Of these warrants, 700,000 can be
exercised at a price of US$1.50, 43,011 can be exercised at a price of US$30.00,
14,000 can be exercised at a price of US$25.00 and 5,000,800 will become
exercisable in January 2002 at a price to be determined at that time. The
42
<PAGE>
weighted average exercise price of the warrants to purchase 757,011 shares is
US$3.55 per share.
A total of 5,112,650 shares of common stock are currently authorized for
grant under our stock option plan. As of November 8, 2000, there were options
outstanding pursuant to the stock option plan to purchase an aggregate of
3,590,150 shares of common stock at exercise prices ranging from US$1.00 to US$
28.00 per share or a weighted average exercise price of US$15.20 per share. A
total of 1,433,000 shares of common stock remained available for future grant.
CONTRACTUAL RIGHTS
We have entered into the Molex agreements pursuant to which Molex has
preemptive rights with respect to any sale of additional shares of our capital
stock which could prevent a third party from effecting a change in control. We
may, however, issue up to 6,000,000 units (comprising one share of common stock
and a warrant) at a price not less than $0.50 per unit to raise capital within a
period ending June 2001 without Molex's consent. We have also entered into
agreements with purchasers of the July 2000 notes and warrants pursuant to which
we agreed that we would not, without their prior consent, obtain additional
equity or equity-linked financing prior to January 25, 2001and that for a
further period of 180 days, should we propose to engage in any equity or
equity-linked financing, we would offer them the opportunity to provide this
financing upon the terms and conditions proposed. This agreement is not
applicable to business combinations or firm commitment public offerings.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is American Stock
Transfer and Trust Company, 40 Wall Street, New York, N.Y. 10005.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
As permitted by law, our certificate of incorporation limits the
personal liability of a director for monetary damages for breach of fiduciary
duty of care as a director. Liability is not eliminated for:
o any breach of the director's duty of loyalty to us or our
stockholders;
o acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
o unlawful payment of dividends or stock purchases or redemptions;
or
o any transaction from which the director derived an improper
personal benefit.
Our certificate of incorporation and by-laws provide that we shall
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed proceeding by reason of the fact that he
is or was a director, officer, employee or an agent of Lumenon or is or was
serving at our request as a director, officer, employee or agent of another
entity, against all outlays incurred by him in connection with these
proceedings.
We propose to enter into indemnity agreements with our directors and
executive officers. The indemnity agreements will provide that we shall
indemnify them from and against liabilities and outlays in connection with any
threatened, pending or completed proceeding in which they are a party (other
than a proceeding by or in the right of Lumenon to procure a judgment in its
favor), unless it is determined that they did not act in good faith and for a
purpose which they reasonably believed to be in the best interests of Lumenon
and, in the case of a criminal proceeding or action, that they had reasonable
cause to believe that their conduct was unlawful. The indemnity agreements will
also provide that we shall indemnify them if they are a party to or threatened
to be made a party to any proceeding by or in the right of Lumenon to procure a
judgment in its favor, unless it is determined that they did not act in good
faith and for a purpose that they reasonably believed to be in, or, in the case
of service to an entity related to Lumenon, not opposed to, the best interests
of Lumenon, except that no indemnification for losses shall be made in respect
of (a) any claim, issue or matter as to which they shall have been adjudged to
be liable to us or (b) any threatened or pending action to which they are a
party or are threatened to be made a party that is settled or otherwise disposed
of, unless and only to the extent that any court in which this action or
proceeding was brought determines upon application that they are fairly and
reasonably entitled to indemnity for these expenses.
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<PAGE>
This indemnification will be in addition to any other rights to which these
officers or directors may be entitled under any law, charter provision, by-law,
agreement, vote of shareholders or otherwise.
We maintain a $5,000,000 directors and officers liability insurance
policy.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to our directors, officers and controlling persons pursuant
to the foregoing provisions, or otherwise, we have been advised that in the
opinion of the SEC this indemnification is against public policy as expressed in
the Securities Act and is, therefore, unenforceable. In the event that a claim
for indemnification against these liabilities (other than the payment by us of
expenses incurred or paid by a director, officer or controlling person of us in
the successful defense of an action, suit or proceeding) is asserted by a
director, officer or controlling person in connection with the securities being
registered, we will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether this indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of the issue.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and current reports, proxy statements and
other information with the SEC. You may read and copy any document we file at
the SEC's public reference room at the following location:
Main Public Reference Room
450 Fifth Street, N.W.
Washington, D.C. 20549
You may obtain information on the operation of the SEC's public
reference rooms by calling the SEC at (800) SEC-0330.
We are required to file these documents with the SEC electronically. You
can access the electronic versions of these filings on the Internet at the SEC's
web site, located at http://www.sec.gov.
We have included this prospectus in our registration statement that we
filed with the SEC. The registration statement provides additional information
that we are not required to include in the prospectus. You can receive a copy of
the entire registration statement as described above. Although this prospectus
describes the material terms of certain contracts, agreements and other
documents filed as exhibits to the registration statement, you should read the
exhibits for a more complete description of the document or matter involved.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to immaterial levels of market risks with respect to
changes in foreign currency exchange rates and interest rates. Market risk is
the potential loss arising from adverse changes in market rates and prices, like
foreign currency exchange and interest rates. To the extent that we consummate
financings outside of Canada, we receive proceed in currency other than the
Canadian dollar. Most of our operating expenses are incurred in Canadian
dollars. Thus, our results of operations will tend to be adversely affected if
there is a strong Canadian dollar. We do not enter into derivatives or other
financial instruments for trading or speculative purposes, nor do we enter into
financial instruments to manage and reduce the impact of changes in foreign
currency exchange rates.
PLAN OF DISTRIBUTION
This prospectus covers 10,800,000 shares of our common stock. All of the
shares offered are being sold by the selling stockholders. We will not realize
any proceeds from the sale of the shares by the selling stockholders. Each of
CVI and Castle Creek purchased its shares in the ordinary course of business.
Molex makes equity investments, from time to time, in its suppliers, including
Lumenon, as part of its strategic plans.
44
<PAGE>
The shares may be sold or distributed from time to time by the selling
stockholders, or by pledgees, donees or transferees of, or other successors in
interest to, the selling stockholders, directly to one or more purchasers
(including pledgees) or through brokers, dealers or underwriters who may act
solely as agents or may acquire shares as principals, at the market prices
prevailing at the time of sale, at prices related to the prevailing market
prices, at negotiated prices or at fixed prices, which may be changed. The
shares may be sold in one or more of the following methods:
o ordinary brokers' transactions, which may include long sales or
short sales effected after the effective date of the registration
statement of which this prospectus is a part;
o transactions involving cross or block trades or otherwise on The
Nasdaq National Market;
o purchases by brokers, dealers or underwriters as principal and
resale by the purchasers for their own accounts pursuant to this
prospectus;
o "at the market" to or through market makers or into an existing
market for the shares;
o in other ways not involving market makers or established trading
markets, including direct sales to purchasers or sales effected
through agents;
o through transactions in options, swaps or other derivatives
(whether exchange-listed or otherwise); or
o any combination of the foregoing, or by any other legally
available means.
The selling stockholders or their successors in interest may also enter
into option or other transactions with broker-dealers that require the delivery
by these broker-dealers of the shares, which shares may be resold thereafter
pursuant to this prospectus. In addition, from time to time, a selling
stockholder may pledge its shares to broker-dealers or other financial
institutions. Upon a default by a selling stockholder, the broker-dealer or
financial institution may offer and sell the pledged shares from time to time.
Brokers, dealers, underwriters or agents participating in the
distribution of the shares as agents may receive compensation in the form of
discounts, commissions or concessions from the selling stockholders and/or
purchasers of the shares for whom they may act as agent, or to whom they may
sell as principal, or both. The selling stockholders and any broker-dealers who
act in connection with the sale of shares of our common stock offered by this
prospectus may be deemed to be "underwriters" within the meaning of the
Securities Act, and any discounts, commissions or concessions they receive and
proceeds of any sale of shares may be deemed to be underwriting discounts and
commissions under the Securities Act. Neither we nor any selling stockholders
can presently estimate the amount of this compensation. We know of no existing
arrangements between any selling stockholder, any other stockholder, broker,
dealer, underwriter or agent relating to the sale or distribution of the shares.
Moreover, a selling stockholder may agree to indemnify any agent, dealer or
broker-dealer that participates in transactions involving sales of the shares
against some liabilities, including liabilities arising under the Securities
Act.
Furthermore, in the event of a "distribution" of shares by a selling
stockholder, the selling stockholder, any selling broker or dealer and any
"affiliated purchasers" may be subject to Regulation M under the Securities
Exchange Act which would generally prohibit these persons from bidding for or
purchasing any security that is the subject of the distribution until his or her
participation in that distribution is completed. In addition, Regulation M
generally prohibits any "stabilizing bid" or "stabilizing purchase" for the
purpose of pegging, fixing or stabilizing the price of common stock in
connection with this offering.
We will pay substantially all of the expenses incident to the
registration, offering and sale of the shares to the public other than the
commissions or discounts of brokers, dealers, underwriters or agents. We have
also agreed to indemnify the selling stockholders and related persons against
liabilities under the Securities Act.
In order to comply with the securities laws of certain states, if
applicable, the shares will be sold in certain jurisdictions only through
registered or licensed brokers or dealers. In addition, in certain states the
shares may not be sold unless they have been registered or qualified for sale in
the applicable state or an exemption from the registration or qualification
requirement is available and is complied with by us and the selling
stockholders.
The selling stockholders are not restricted as to the price or prices at
which they may sell their shares. Sales of these shares may have an adverse
effect on the market price of the common stock. Moreover, the selling
stockholders are not restricted as to the number of shares that may be sold at
any time and it is possible that a significant number of shares could be sold at
the same time which may also have an adverse effect on the market price of the
common stock.
45
<PAGE>
LEGAL MATTERS
The validity of the issuance of the shares of common stock offered by
this prospectus is being passed upon for us by Olshan Grundman Frome Rosenzweig
& Wolosky LLP, New York, New York.
EXPERTS
Our consolidated financial statements as of June 30, 2000 and June 30,
1999, and for the year ended December 31, 1998, appearing in this prospectus
have been audited by KPMG LLP, independent auditors, as set forth in their
reports appearing elsewhere in this prospectus, and are included in reliance
upon the reports given on this authority as experts in accounting and auditing.
46
<PAGE>
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
kpmg
LUMENON INNOVATIVE LIGHTWAVE
TECHNOLOGY, INC.
(a Development Stage Enterprise)
Consolidated Financial Statements
Year ended June 30, 2000, six-month period ended June 30, 1999 and periods from
inception (March 2, 1998) to December 31, 1998 and to June 30, 2000
Financial Statements
Independent Accountant's Report..................................... F-2
Consolidated Balance Sheets......................................... F-3
Consolidated Statements of Operations............................... F-4
Consolidated Statements of Cash Flows............................... F-5
Consolidated Statements of Stockholders' Equity..................... F-6
Notes to Consolidated Financial Statements.......................... F-7
F-1
<PAGE>
AUDITORS' REPORT TO THE SHAREHOLDERS
We have audited the consolidated balance sheets of Lumenon Innovative Lightwave
Technology, Inc. (the "Corporation") as at June 30, 2000 and June 30, 1999 and
the consolidated statements of operations, cash flows and stockholders' equity
for the year ended June 30, 2000, the six-month period ended June 30, 1999 and
for the periods from inception (March 2, 1998) to December 31, 1998 and to June
30, 2000. These financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the consolidated financial position of the Corporation as at
June 30, 2000 and June 30, 1999 and the consolidated results of its operations
and cash flows for the year ended June 30, 2000 and for the six-month period
ended June 30, 1999 and for the periods from inception (March 2, 1998) to
December 31, 1998 and to June 30, 2000, in accordance with accounting principles
generally accepted in the United States of America.
/S/ KPMG LLP
Chartered Accountants
Montreal, Canada
July 21, 2000, except as to note 11 (b)
which is as of July 25, 2000
F-2
<PAGE>
LUMENON INNOVATIVE LIGHTWAVE
TECHNOLOGY, INC.
(a Development Stage Enterprise)
Consolidated Balance Sheets
<TABLE>
<CAPTION>
==========================================================================================================================
June 30, June 30, June 30,
2000 2000 1999
--------------------------------------------------------------------------------------------------------------------------
(US$) (CAN$) (CAN$)
(note 2 (a))
<S> <C> <C> <C>
Assets
Current assets:
Cash $ 761,113 $ 1,125,382 $ 1,722,871
Term deposits 2,907,891 4,299,608 --
Interest and sales tax receivable 247,487 365,934 237,539
Research tax credits receivable 128,990 190,724 34,218
Prepaid expenses 52,264 77,281 49,956
--------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------
4,097,745 6,058,929 2,044,584
Deposits (note 7) 1,031,495 1,525,168 --
Property and equipment (note 4) 3,112,865 4,602,682 1,492,495
Other assets 8,873 13,119 10,001
--------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------
$ 8,250,978 $ 12,199,898 $ 3,547,080
==========================================================================================================================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 708,157 $ 1,047,082 $ 523,550
Accrued liabilities 150,615 222,700 172,812
Accrued vacation 68,918 101,902 7,500
Obligations under capital leases (note 5) 158,955 235,031 --
Convertible promissory notes -- -- 298,720
--------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------
1,086,645 1,606,715 1,002,582
Obligations under capital leases (note 5) 188,480 278,686 --
Stockholders' equity:
Share capital (note 6) 33,239 49,147 30,330
Additional paid-in capital (notes 3 and 6 (a)) 158,842,502 234,864,524 3,404,408
Deposit on subscription of shares -- -- 146,820
Accumulated deficit during the development
stage (151,899,888) (224,599,174) (1,037,060)
--------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------
6,975,853 10,314,497 2,544,498
Commitments (note 7)
Subsequent events (note 11)
--------------------------------------------------------------------------------------------------------------------------
$ 8,250,978 $ 12,199,898 $ 3,547,080
==========================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
On behalf of the Board:
______________________ Director
______________________ Director
F-3
<PAGE>
LUMENON INNOVATIVE LIGHTWAVE
TECHNOLOGY, INC.
(a Development Stage Enterprise)
Consolidated Statements of Operations
<TABLE>
<CAPTION>
====================================================================================================================================
Year Year Six-month From From
ended ended period ended inception to inception to
June 30, June 30, June 30, December 31, June 30,
2000 2000 1999 1998 2000
------------------------------------------------------------------------------------------------------------------------------------
(US$) (CAN$) (CAN$) (CAN$) (CAN$)
(note 2 (a))
<S> <C> <C> <C> <C> <C>
Expenses:
Research and development:
External research
(note 3) $ 147,019,020 $ 217,382,323 $ 25,000 $ -- $ 217,407,323
Internal research 1,270,292 1,878,253 169,439 14,440 2,062,132
Tax credits and grants (197,631) (292,218) (32,069) (2,149) (326,436)
-----------------------------------------------------------------------------------------------------------------------------
148,091,681 218,968,358 162,370 12,291 219,143,019
General and administrative 2,718,761 4,019,959 569,507 290,435 4,879,901
Depreciation 604,369 893,620 -- -- 893,620
-----------------------------------------------------------------------------------------------------------------------------
3,323,130 4,913,579 569,507 290,435 5,773,521
Other income (expenses):
Interest, net 160,257 236,956 1,172 7,869 245,997
Gain (loss) on foreign exchange 56,044 82,867 (18,846) 7,348 71,369
-----------------------------------------------------------------------------------------------------------------------------
216,301 319,823 (17,674) 15,217 317,366
------------------------------------------------------------------------------------------------------------------------------------
Net loss $ 151,198,510 $ 223,562,114 $ 749,551 $ 287,509 $ 224,599,174
====================================================================================================================================
Net loss per share:
Basic and diluted $ 5.95 $ 8.80 $ 0.04 $ 0.02
====================================================================================================================================
Weighted average number
of shares outstanding 25,415,601 25,415,601 17,480,967 14,972,188
====================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
LUMENON INNOVATIVE LIGHTWAVE
TECHNOLOGY, INC.
(a Development Stage Enterprise)
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
===================================================================================================================================
Year Year Six-month From From
ended ended period ended inception to inception to
June 30, June 30, June 30, December 31, June 30,
2000 2000 1999 1998 2000
-----------------------------------------------------------------------------------------------------------------------------------
(US$) (CAN$) (CAN$) (CAN$) (CAN$)
(note 2 (a))
<S> <C> <C> <C> <C> <C>
Cash flows from:
Operations:
Net loss $(151,198,510) $(223,562,114) $ (749,551) $ (287,509) $(224,599,174)
Adjustment for item not
involving cash:
Compensation cost
(note 6 (b) (ii)) 34,709 51,321 241,058 -- 292,379
Common shares issued
for services (note 3) 147,003,070 217,358,739 -- -- 217,358,739
Depreciation 604,369 893,620 -- -- 893,620
Change in operating assets and liabilities:
Interest and sales tax
receivable (86,836) (128,395) (216,446) (21,093) (365,934)
Research tax credits
receivable (105,847) (156,506) (32,069) (2,149) (190,724)
Prepaid expenses (18,480) (27,325) (49,956) -- (77,281)
Accounts payable and
accrued liabilities (note 9) 126,104 186,456 584,513 119,349 890,318
---------------------------------------------------------------------------------------------------------------------------
(3,641,421) (5,384,204) (222,451) (191,402) (5,798,057)
Financing:
Proceeds from issuance of
common shares 9,695,938 14,336,414 2,764,297 372 17,101,083
Cash from the acquisition of a
subsidiary -- -- -- 814,322 814,322
Share issue expenses (482,268) (713,081) (291,932) (93,379) (1,098,392)
Principal repayments of capital
lease obligations (60,736) (89,805) -- -- (89,805)
Deposit on subscription of shares -- -- 146,820 -- 146,820
Proceeds from issuance of
convertible promissory notes -- -- 298,720 -- 298,720
---------------------------------------------------------------------------------------------------------------------------
9,152,934 13,533,528 2,917,905 721,315 17,172,748
Investments:
Additions to property
and equipment (note 9) (1,974,110) (2,918,919) (1,492,495) -- (4,411,414)
Additions to other assets (2,109) (3,118) (9,758) (243) (13,119)
Deposits (1,031,495) (1,525,168) -- -- (1,525,168)
Purchase of term deposits (13,399,870) (19,813,048) -- -- (19,813,048)
Disposal of term deposits 10,491,980 15,513,440 -- -- 15,513,440
---------------------------------------------------------------------------------------------------------------------------
(5,915,604) (8,746,813) (1,502,253) (243) (10,249,309)
---------------------------------------------------------------------------------------------------------------------------------
(Decrease) increase in cash (404,091) (597,489) 1,193,201 529,670 1,125,382
Cash, beginning of period 1,165,204 1,722,871 529,670 -- --
---------------------------------------------------------------------------------------------------------------------------------
Cash, end of period $ 761,113 $ 1,125,382 $ 1,722,871 $ 529,670 $ 1,125,382
=================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
LUMENON INNOVATIVE LIGHTWAVE
TECHNOLOGY, INC.
(a Development Stage Enterprise)
Consolidated Statements of Stockholders' Equity
Periods from inception (March 2, 1998) to June 30, 2000
(in Canadian dollars)
<TABLE>
<CAPTION>
====================================================================================================================================
Additional Deposit on
paid-in Accumulated subscription
Shares Par value capital deficit of shares Total
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Issue of common shares
at inception 255,000 $ 372 $ -- $ -- $ -- $ 372
Issue of common shares 16,200,000 24,430 789,892 -- -- 814,322
Share issue expenses -- -- (93,379) -- -- (93,379)
Net loss for the period -- -- -- (287,509) -- (287,509)
------------------------------------------------------------------------------------------------------------------------------------
Balance as at December 31,
1998 16,455,000 24,802 696,513 (287,509) -- 433,806
Issue of common shares 3,760,000 5,528 2,758,769 -- -- 2,764,297
Share issue expenses -- -- (291,932) -- -- (291,932)
Compensation cost related to
stock options granted -- -- 241,058 -- -- 241,058
Net loss for the period -- -- -- (749,551) -- (749,551)
Deposit on subscription
of shares -- -- -- -- 146,820 146,820
------------------------------------------------------------------------------------------------------------------------------------
Balance as at June 30, 1999 20,215,000 30,330 3,404,408 (1,037,060) 146,820 2,544,498
Issue of common shares 12,755,039 18,817 232,121,876 -- (146,820) 231,993,873
Share issue expenses -- -- (713,081) -- -- (713,081)
Compensation cost related
to stock options granted -- -- 51,321 -- -- 51,321
Net loss for the period -- -- -- (223,562,114) -- (223,562,114)
------------------------------------------------------------------------------------------------------------------------------------
Balance as at June 30, 2000 32,970,039 $49,147 $ 234,864,524 $(224,599,174) $ -- $ 10,314,497
====================================================================================================================================
Balance as at June 30, 2000
in US dollars (note 2 (a)) 32,970,039 $33,239 $ 158,842,502 $(151,899,888) $ -- $ 6,975,853
====================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
LUMENON INNOVATIVE LIGHTWAVE
TECHNOLOGY, INC.
(a Development Stage Enterprise)
Notes to Consolidated Financial Statements
Year ended June 30, 2000 and six-month period ended June 30, 1999 and periods
from inception (March 2, 1998) to December 31, 1998 and to June 30, 2000 (in
Canadian dollars)
================================================================================
1. Organization and business activities:
Lumenon Innovative Lightwave Technology, Inc. ("Lumenon") was incorporated
in the State of Delaware in February 1996 under the name of WWV
Development Inc. as a shell company.
In July 1998, under an acquisition plan, Lumenon acquired LILT Canada Inc.
("LILT"), a Canadian corporation, by issuing 12,200,000 common shares to
the shareholders of LILT which resulted in the change in control of
Lumenon. Accordingly, LILT has been determined the acquiring corporation
and these consolidated financial statements present the results of
operations and cash flows of LILT since its inception, March 2, 1998.
Under the plan mentioned above, Lumenon issued 4,000,000 common shares to
acquire Dequet Capital, Inc., a Nevada corporation. Dequet Capital, Inc.'s
only asset was cash in the amount of $814,322 (US$540,000). This company
was subsequently dissolved.
The Corporation's principal business activity is to design, develop and
build integrated optic devices in the form of compact hybrid glass
circuits on silicon chips. Lumenon activities are performed through LILT,
in Canada. In 1999, its year-end has been changed from December 31, to
June 30.
The Corporation is subject to a number of risks, including successful
development and marketing of its technology and attracting and retaining
key personnel. In order to achieve its business plan, the Corporation
anticipates the need to raise additional capital (see notes 3 and 11).
2. Significant accounting policies:
These financial statements have been prepared by management in accordance
with accounting principles generally accepted in the United States. The
significant accounting principles are as follows:
(a) Consolidated financial statements and basis of presentation:
The consolidated financial statements include the accounts of
Lumenon and the accounts of LILT. All intercompany transactions and
balances have been eliminated.
US dollar amounts presented on the consolidated balance sheets,
consolidated statements of operations and cash flows are provided
for convenience of reference only and are based on the closing
exchange rate at June 30, 2000, which was $1.4786 Canadian dollar
per US dollar.
The functional currency of the Corporation is the Canadian dollar.
F-7
<PAGE>
LUMENON INNOVATIVE LIGHTWAVE
TECHNOLOGY, INC.
(a Development Stage Enterprise)
Notes to Consolidated Financial Statements, Continued
Year ended June 30, 2000 and six-month period ended June 30, 1999 and periods
from inception (March 2, 1998) to December 31, 1998 and to June 30, 2000 (in
Canadian dollars)
================================================================================
2. Significant accounting policies (continued):
(b) Cash and cash equivalents:
The Corporation considers all investments that are highly liquid
with an original maturity of three months or less and readily
convertible into cash to be cash equivalents. As at June 30, 2000
and 1999, there were no cash equivalents.
(c) Property and equipment:
Equipment and leasehold improvements are recorded at cost.
Depreciation and amortization are provided using the straight-line
method and the following periods:
====================================================================
Asset Period
--------------------------------------------------------------------
Computer equipment and software 3 years
Office equipment and fixtures 5 years
Leasehold improvements Term of lease
Laboratory and pilot plant equipment 3 years
====================================================================
(d) Other assets:
Other assets, consisting of license and patent costs, are recorded
at cost when acquired and are being amortized on a straight-line
basis over their economic useful lives or their legal terms of
existence, ranging between 10 and 20 years. The capitalized amount
with respect to those assets does not necessarily reflect their
present or future value and the amount ultimately recoverable is
dependent upon the successful commercialization of the related
products.
(e) Research and development costs:
Research and development costs and the cost of intangibles, that are
purchased from others for use in research and development activities
and that have no alternative future uses, are expensed as incurred.
Research tax credits on eligible research expenses incurred in
Canada are accounted for as a reduction of research and development
expenses.
F-8
<PAGE>
LUMENON INNOVATIVE LIGHTWAVE
TECHNOLOGY, INC.
(a Development Stage Enterprise)
Notes to Consolidated Financial Statements, Continued
Year ended June 30, 2000 and six-month period ended June 30, 1999 and periods
from inception (March 2, 1998) to December 31, 1998 and to June 30, 2000 (in
Canadian dollars)
================================================================================
2. Significant accounting policies (continued):
(f) Foreign exchange:
The Canadian dollar is the functional currency of the Corporation.
Foreign denominated monetary assets and liabilities are translated
at the rate of exchange prevailing at the balance sheet date.
Non-monetary assets and liabilities are translated at the rate of
exchange prevailing at the date of the transaction. Revenues and
expenses are translated at the monthly average exchange rate
prevailing during the period. Foreign exchange gains and losses are
included in the determination of net earnings.
(g) Income taxes:
The Corporation uses the asset and liability method of accounting
for income taxes. Under this method, deferred tax assets and
liabilities are recognized for the estimated future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax
bases. This method also requires the recognition of future tax
benefits such as net operating loss carryforwards, to the extent
that realization of such benefits is more likely than not. Deferred
tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax
rates is recognized in the statement of operations in the period
that includes the enactment date.
(h) Comprehensive income:
Since its inception on March 2, 1998, the Corporation adopted
Statement of Financial Accounting Standards No. 130, REPORTING
COMPREHENSIVE INCOME, which establishes new rules for the reporting
and display of comprehensive income and its components. The adoption
of this statement had no impact on the Corporation's net income or
stockholders' equity.
(i) Stock option plan:
The Corporation applies the intrinsic value-based method of
accounting prescribed by Accounting Principles Board ("APB") Opinion
no. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related
interpretations for stock options granted to employees. As such,
compensation expense would be recorded on the date of grant only if
the then current market price of the underlying stock exceeded the
exercise price.
F-9
<PAGE>
LUMENON INNOVATIVE LIGHTWAVE
TECHNOLOGY, INC.
(a Development Stage Enterprise)
Notes to Consolidated Financial Statements, Continued
Year ended June 30, 2000 and six-month period ended June 30, 1999 and periods
from inception (March 2, 1998) to December 31, 1998 and to June 30, 2000 (in
Canadian dollars)
================================================================================
2. Significant accounting policies (continued):
(i) Stock option plan (continued):
The Corporation applies FASB Statement 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION ("SFAS 123") for stock options granted to
non-employees. As such, compensation expense is recorded at the date
of grant, based on the fair value as at that date using the
Black-Scholes option - pricing model.
(j) Impairment of long-lived assets and long-lived assets to be disposed
of:
The Corporation accounts for long-lived assets in accordance with
the provisions of SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF
LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF. This
statement requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to
future net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of
the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair
value less costs to sell.
(k) Net loss per share:
Net loss per share is computed using the weighted average number of
shares outstanding during the period. Under the accounting for the
LILT transaction described in note 1, the 12,200,000 shares have
been considered to be outstanding on a retroactive basis for all
periods presented.
(l) Use of estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent liabilities at the date of
the financial statements and the reported amounts of revenues and
expenses during the reporting periods. Actual results could differ
from those estimates.
F-10
<PAGE>
LUMENON INNOVATIVE LIGHTWAVE
TECHNOLOGY, INC.
(a Development Stage Enterprise)
Notes to Consolidated Financial Statements, Continued
Year ended June 30, 2000 and six-month period ended June 30, 1999 and periods
from inception (March 2, 1998) to December 31, 1998 and to June 30, 2000 (in
Canadian dollars)
================================================================================
3. The Molex agreement:
Under the terms of a Teaming Agreement, Lumenon and Molex Incorporated
("Molex") agreed to jointly develop certain products related to the Dense
Wavelength Division Multiplexing market and other photonic devices. Under
the terms of the agreement, Molex is committed to provide services towards
the development of the products. In connection therewith, Lumenon granted
to Molex a warrant to receive 5,800,000 common shares issuable as Molex
fulfills its obligations pursuant to the Teaming Agreement. For the year
ended June 30, 2000, an amount of $217,358,739 (US$147,003,070) was
recorded under research and development expenses and shares pursuant to
the warrant were issued (see note 6 (a) (vi)). Under the terms of this
agreement amended during 2000, Molex is committed to purchase a certain
number of photonic devices of Lumenon for the first twelve months. After
the twelve-month period, Molex will have the option to purchase up to 50%
of the excess capacity of Lumenon and both Lumenon and Molex will share
Molex's profit upon resale of those devices. Under certain circumstances,
Molex may have the right to manufacture all components of the devices in
return of a royalty as defined in the agreement.
4. Property and equipment:
==========================================================================
June 30, 2000
------------------------------------
Accumulated Net book
Cost depreciation value
--------------------------------------------------------------------------
Computer equipment and software $ 407,294 $ 45,756 $ 361,538
Office equipment and fixtures 198,002 13,506 184,496
Leasehold improvements 1,051,538 78,582 972,956
Laboratory and pilot plant equipment 3,839,468 755,776 3,083,692
--------------------------------------------------------------------------
$5,496,302 $ 893,620 $4,602,682
==========================================================================
Equipment held under capital leases for which the cost and net book value
amount to $603,522 (US$408,171) and $542,557 (US$366,940), respectively,
are included in laboratory and pilot plant equipment.
F-11
<PAGE>
LUMENON INNOVATIVE LIGHTWAVE
TECHNOLOGY, INC.
(a Development Stage Enterprise)
Notes to Consolidated Financial Statements, Continued
Year ended June 30, 2000 and six-month period ended June 30, 1999 and periods
from inception (March 2, 1998) to December 31, 1998 and to June 30, 2000 (in
Canadian dollars)
================================================================================
4. Property and equipment (continued):
==========================================================================
June 30, 1999
---------------------------------
Accumulated Net book
Cost depreciation value
--------------------------------------------------------------------------
Computer equipment and software $ 40,250 $ -- $ 40,250
Office equipment and fixtures 17,618 -- 17,618
Leasehold improvements 191,807 -- 191,807
Laboratory and pilot plant equipment 1,242,820 -- 1,242,820
--------------------------------------------------------------------------
$1,492,495 $ -- $1,492,495
==========================================================================
All property and equipment were purchased during the six-month period
ended June 30, 1999. No depreciation was recorded for the same period as
the installation was completed in July 1999.
5. Obligations under capital leases:
Future minimum lease payments under capital leases are as follows:
--------------------------------------------------------------------------
2001 $ 284,823
2002 175,726
2003 135,832
--------------------------------------------------------------------------
Total minimum lease payments 596,381
Less amount representing interest (at rates varying
from 11.75% to 18.85%) 82,664
--------------------------------------------------------------------------
Present value of net minimum capital lease payments 513,717
Current portion of obligations under capital leases 235,031
--------------------------------------------------------------------------
Long-term portion of obligations under capital leases $ 278,686
==========================================================================
F-12
<PAGE>
LUMENON INNOVATIVE LIGHTWAVE
TECHNOLOGY, INC.
(a Development Stage Enterprise)
Notes to Consolidated Financial Statements, Continued
Year ended June 30, 2000 and six-month period ended June 30, 1999 and periods
from inception (March 2, 1998) to December 31, 1998 and to June 30, 2000 (in
Canadian dollars)
================================================================================
6. Share capital:
==========================================================================
June 30, June 30,
2000 1999
--------------------------------------------------------------------------
Authorized:
1,000,000 preferred shares, par value of
US$0.001 per share
100,000,000 common shares, par value
of US$0.001 per share
Issued and outstanding:
32,970,039 common shares (1999 - 20,215,000) $ 49,147 $ 30,330
--------------------------------------------------------------------------
(a) Issue of shares:
As mentioned in note 1, Lumenon acquired LILT in 1998 under a
reorganization and acquisition plan by issuing 12,200,000 common
shares to the shareholders of that corporation. At the date of
acquisition, there were 255,000 outstanding common shares of Lumenon
at an amount of $372 (US$255). In addition, Lumenon issued 4,000,000
common shares to the shareholders of Dequet Capital, Inc. Assets of
the latter consisted of cash in the amount of $814,322 (US$540,000).
1999
----
During the six-month period ended June 30, 1999, the Corporation
entered into a Stock Purchase Agreement with Molex who agreed to
purchase from Lumenon 3,000,000 common shares at $0.74 (US$0.50) per
share in two transactions. The first closing was held in June 1999
for 1,500,000 common shares. In total, the Corporation issued
3,760,000 common shares during the period for a cash consideration
of $2,764,297 (US$1,880,000) along with warrants for the purchase of
3,926,667 common shares at a price of $1.32 (US$0.90) per share.
F-13
<PAGE>
LUMENON INNOVATIVE LIGHTWAVE
TECHNOLOGY, INC.
(a Development Stage Enterprise)
Notes to Consolidated Financial Statements, Continued
Year ended June 30, 2000 and six-month period ended June 30, 1999 and periods
from inception (March 2, 1998) to December 31, 1998 and to June 30, 2000 (in
Canadian dollars)
================================================================================
6. Share capital (continued):
(a) Issue of shares (continued):
2000
----
During the year ended June 30, 2000, the Corporation concluded the
following share capital transactions:
(i) 1,484,522 common shares were issued for a cash consideration
of $7,099,319 (US$4,843,500), of which $146,820 (US$99,297)
was received prior to June 30, 1999;
(ii) promissory notes were converted into 400,000 common shares
with a value of $298,720 (US$200,000);
(iii) in connection with the issuance of common shares referred to
in (i) and (ii), 1,912,211 warrants were issued to be
exercised at prices varying from $1.33 (US$0.90) to $44.36
(US$30.00) per share;
(iv) the second closing of the Stock Purchase Agreement with Molex,
which was subject to Lumenon proving out its technology and
its ability to manufacture and deliver certain devices, took
place in March 2000 for an additional 1,500,000 common shares
and related cash consideration of $1,093,125 (US$750,000);
(v) 3,570,517 common shares were issued upon exercise of warrants
and options for cash consideration of $6,103,916
(US$4,171,350);
(vi) 5,800,000 common shares were issued for services received from
Molex in the amount of $217,358,739 (US$147,003,070). Value of
the shares issued has been recorded as Molex fulfilled its
obligations pursuant to the Teaming Agreement (see note 3).
The transaction was accounted for by using the average market
price of the shares of the Corporation during the periods the
services were rendered by Molex.
Under the terms of a Stock Restriction Agreement, no primary
stockholders can sell any share to competitors of Molex without
Molex's prior consent. The agreement includes certain rights of
first refusal and preemptive rights except that Lumenon can issue
6,000,000 units to raise capital within 24 months from the date of
the agreement, being June 21, 1999. One unit is comprised of one
common share and a warrant for the purchase of one common share. The
common share can be sold at a price not less than $0.74 (US$0.50)
and the warrant can be exercised at a price not less than $1.33
(US$0.90) per share.
Certain rights or restrictions terminate upon completion of a Public
Sale or a Public Offering as defined in the agreement.
F-14
<PAGE>
LUMENON INNOVATIVE LIGHTWAVE
TECHNOLOGY, INC.
(a Development Stage Enterprise)
Notes to Consolidated Financial Statements, Continued
Year ended June 30, 2000 and six-month period ended June 30, 1999 and periods
from inception (March 2, 1998) to December 31, 1998 and to June 30, 2000 (in
Canadian dollars)
================================================================================
6. Share capital (continued):
(b) Stock option plan:
Under a stock option incentive plan established in May 1999, the
Corporation may grant options to purchase common shares to key
employees, directors, officers and service-providers. The terms,
number of common shares covered by each option as well as the
permitted frequency of the exercise of such options is determined by
the Board of Directors. The plan contemplates that a maximum of
4,000,000 common shares may be optioned under the stock option plan.
No optionee can hold options to purchase more than 5% of the number
of shares issued and outstanding at any time. The subscription price
for each share covered by an option is established by the Board of
Directors but such price shall not be lower than the market value at
the date of grant.
Options for the purchase of 3,190,000 common shares at a price
ranging from $1.47 (US$1.00) to $41.40 (US$28.00) per share have
been granted to June 30, 2000.
Options granted have to be exercised over a period not exceeding
seven years. At June 30, 2000, 1,031,650 outstanding options are
exercisable and 1,245,500 outstanding options vest over a period of
one to five years.
(i) Changes in outstanding options for the period were as follows:
<TABLE>
<CAPTION>
================================================================================
Weighted average
Number exercise price per share
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Options outstanding, January 1, 1999 - $ -
Granted 1,940,000 1.44 (US$0.98)
--------------------------------------------------------------------------------
Options outstanding, June 30, 1999 1,940,000
Granted 1,250,000 $ 25.41 (US$17.18)
Exercised (822,850) 1.40 (US$0.95)
Cancelled (90,000) 2.29 (US$1.56)
--------------------------------------------------------------------------------
Options outstanding, June 30, 2000 2,277,150
================================================================================
</TABLE>
F-15
<PAGE>
LUMENON INNOVATIVE LIGHTWAVE
TECHNOLOGY, INC.
(a Development Stage Enterprise)
Notes to Consolidated Financial Statements, Continued
Year ended June 30, 2000 and six-month period ended June 30, 1999 and periods
from inception (March 2, 1998) to December 31, 1998 and to June 30, 2000 (in
Canadian dollars)
================================================================================
6. Share capital (continued):
(b) Stock option plan (continued):
(ii) The following table summarizes significant ranges of
outstanding options as at June 30, 2000:
<TABLE>
<CAPTION>
================================================================================
Options outstanding Options exercisable
------------------------------------ ----------------------
Weighted Weighted Weighted
Range of average average average
exercise remaining exercise exercise
prices Options life price Options price
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$1.47 - $11.83 1,212,150 2.7 years $ 2.01 1,031,650 $ 1.47
$16.28 - $29.57 680,000 5.0 years 24.63 -- --
$32.53 - $41.40 385,000 3.6 years 36.41 -- --
================================================================================
</TABLE>
(iii) Stock-based compensation:
The Corporation applies APB Opinion 25, ACCOUNTING FOR STOCK
ISSUED TO EMPLOYEES, in accounting for its stock option plan.
The exercise price of all stock options is equal to the market
price of the stock at the date of grant and, accordingly, no
compensation cost has been recognized for stock options
granted to employees in the financial statements. Had
compensation cost for the Corporation's stock option plan been
determined based on the fair value at the grant dates for
awards under the plan consistent with the method of FASB
Statement 123, ACCOUNTING FOR STOCK-BASED COMPENSATION ("SFAS
123"), the Corporation's net loss would have been adjusted to
the pro-forma amounts indicated below:
<TABLE>
<CAPTION>
==========================================================================================================
Year Six-month From From
ended ended inception to inception to
June 30, June 30, December 31, June 30,
2000 1999 1998 2000
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net loss As reported $ 223,562,114 $ 749,551 $ 287,509 $ 224,599,174
Pro-forma 225,874,543 1,120,362 287,509 227,282,414
----------------------------------------------------------------------------------------------------------
Pro-forma
compensation $ 2,312,429 $ 370,811 $ - $ 2,683,240
==========================================================================================================
</TABLE>
US dollars
(note 2 (a)) As reported $ 151,198,510
Pro-forma 152,762,439
------------------------------------------------
$ 1,563,929
================================================
F-16
<PAGE>
LUMENON INNOVATIVE LIGHTWAVE
TECHNOLOGY, INC.
(a Development Stage Enterprise)
Notes to Consolidated Financial Statements, Continued
Year ended June 30, 2000 and six-month period ended June 30, 1999 and periods
from inception (March 2, 1998) to December 31, 1998 and to June 30, 2000 (in
Canadian dollars)
================================================================================
6. Share capital (continued):
(b) Stock option plan (continued):
(iii) Stock-based compensation (continued):
<TABLE>
<CAPTION>
=============================================================================
Year Six-month From
ended ended inception to
June 30, June 30, December 31,
2000 1999 1998
-----------------------------------------------------------------------------
<S> <C> <C> <C>
Pro-forma net loss per share:
Basic and diluted $ 8.89 $ 0.06 $ 0.02
U.S dollars 6.01
=============================================================================
</TABLE>
The fair value of each option grant was estimated on the date
of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions: risk-free interest of
approximately 5.8%, dividend yield of 0%, expected volatility
of 200% and expected life of 2 to 5 years (1999 - risk-free
interest rate of approximately 5.5%, dividend yield of 0%,
expected volatility of 90%, and expected life of 3 years). The
per share weighted average fair value of stock options granted
during 2000 and 1999 was $27.07 (US$18.31) and $0.87
(US$0.59), respectively.
Compensation costs of $51,321 (1999 - $241,058) for stock
options granted to non-employees have been recognized in the
financial statements.
(c) Warrants:
The following warrants are outstanding at June 30, 2000:
====================================================================
Warrants Expiry date Exercise price per share*
--------------------------------------------------------------------------------
1,060,000 August 2000 $ 1.33 (US$0.90)
296,700 September 2000 8.87 (US$6.00)
21,500 September 2000 13.12 (US$9.00)
10,000 October 2000 22.92 (US$15.50)
43,011 December 2000 34.00 (US$30.00)
760,000 June 2001 2.22 (US$1.50)
500,000 August 2001 1.33 (US$0.90)
400,000 October 2001 1.33 (US$0.90)
--------------------------------------------------------------------------------
3,091,211
--------------------------------------------------------------------------------
* The warrants are exercisable in US$.
F-17
<PAGE>
LUMENON INNOVATIVE LIGHTWAVE
TECHNOLOGY, INC.
(a Development Stage Enterprise)
Notes to Consolidated Financial Statements, Continued
Year ended June 30, 2000 and six-month period ended June 30, 1999 and periods
from inception (March 2, 1998) to December 31, 1998 and to June 30, 2000 (in
Canadian dollars)
================================================================================
7. Commitments:
(a) Under the terms of a license agreement entered into in July 1998,
Lumenon has the rights to produce, sell, distribute and promote
products derived from the know-how relating to integrated optical
components for Dense Wavelength Division Multiplexing and Plastic
Optical Fibre devices for telecommunications, data communications
and sensor applications. Lumenon is committed to pay a royalty of 5%
on gross sales up to a maximum amount of $3,500,000 (US$2,367,104)
until October 2017.
(b) The Corporation leases premises under operating lease agreements
that expire in January 2004 and July 2012. The first lease contains
a renewal option for a period of five years at the end of the
initial term. Those leases require the Corporation to pay all
executory costs such as maintenance and insurance. Rental payments
under the terms of these leases are secured by a deposit of $750,000
(US$507,000), of which $75,000 (US$50,700) is refundable per year.
In addition, the Corporation leases certain equipment under
operating leases. Minimum lease payments under operating lease
agreements for premises and equipment for the next five years and
thereafter are as follows:
====================================================================
2001 $ 978,497
2002 902,828
2003 866,462
2004 839,728
2005 802,300
Thereafter 6,211,447
--------------------------------------------------------------------
$ 10,601,262
====================================================================
F-18
<PAGE>
LUMENON INNOVATIVE LIGHTWAVE
TECHNOLOGY, INC.
(a Development Stage Enterprise)
Notes to Consolidated Financial Statements, Continued
Year ended June 30, 2000 and six-month period ended June 30, 1999 and periods
from inception (March 2, 1998) to December 31, 1998 and to June 30, 2000 (in
Canadian dollars)
================================================================================
7. Commitments (continued):
(c) The Corporation is committed to purchase equipment in the amount of
$4,377,917 (US$2,960,853), for which $775,168 (US$524,258) was
disbursed as at June 30, 2000 and recorded under deposits.
In addition, the Corporation is committed to acquire equipment
through capital leases in the amount of $1,133,485 (US$766,593).
Estimated future repayments including interest are as follows:
====================================================================
2001 $ 375,376
2002 462,780
2003 398,238
2004 55,133
--------------------------------------------------------------------
$ 1,291,527
====================================================================
(d) The following schedule shows the composition of total rental expense
for all operating leases:
====================================================================
Six-month
Year ended period ended
June 30, June 30,
2000 1999
-------------------------------------------------------------------
Minimum rental payments $ 78,168 $ 26,735
====================================================================
There was no rental agreement before the six-month period ended June
30, 1999.
F-19
<PAGE>
LUMENON INNOVATIVE LIGHTWAVE
TECHNOLOGY, INC.
(a Development Stage Enterprise)
Notes to Consolidated Financial Statements, Continued
Year ended June 30, 2000 and six-month period ended June 30, 1999 and periods
from inception (March 2, 1998) to December 31, 1998 and to June 30, 2000 (in
Canadian dollars)
================================================================================
8. Income taxes:
Details of the components of income taxes are as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------
Six-month From inception
Year ended period ended to
June 30, June 30, December 31,
2000 1999 1998
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net loss:
US operations $ 217,736,986 $ 241,058 $ -
Canadian operations 5,825,128 508,493 287,509
------------------------------------------------------------------------------------------------------
223,562,114 749,551 287,509
Less:
Compensation cost not deductible
for tax purposes 51,321 241,058 -
Expense related to the Teaming
Agreement no deductible for tax
purposes 210,510,490 - -
======================================================================================================
8,000,303 508,493 287,509
------------------------------------------------------------------------------------------------------
Basic income tax rate 38% 38% 38%
------------------------------------------------------------------------------------------------------
3,040,115 193,227 109,253
Adjustment in income taxes resulting from:
Loss carryforwards and unclaimed
deductions not recognized 3,040,115 193,227 109,253
------------------------------------------------------------------------------------------------------
$ - $ - $ -
======================================================================================================
</TABLE>
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of
the deferred tax assets will not be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable
income and tax planning strategies. Since the Corporation is a development
stage corporation, the generation of future taxable income is dependent on
the successful commercialization of its products and technologies.
At June 30, 2000, Lumenon and its subsidiary, LILT, the Canadian
Corporation, had accumulated scientific research and experimental
development expenditures and other unclaimed deductions which are
available to reduce future years' taxable income.
F-20
<PAGE>
LUMENON INNOVATIVE LIGHTWAVE
TECHNOLOGY, INC.
(a Development Stage Enterprise)
Notes to Consolidated Financial Statements, Continued
Year ended June 30, 2000 and six-month period ended June 30, 1999 and periods
from inception (March 2, 1998) to December 31, 1998 and to June 30, 2000 (in
Canadian dollars)
================================================================================
8. Income taxes (continued):
Details of the available deductions are as follows:
==========================================================================
<TABLE>
<CAPTION>
Lumenon LILT
---------------------------------
Federal Provincial
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Research and development expenditures,
without time limitation $ - $ 7,963,000 $ 8,394,000
Excess of net book value of property and
equipment over the undepreciated
capital cost - (2,944,569) (3,154,954)
Losses carried forward:
Expiring - 2006 - 315,000 358,000
- 2007 - 1,494,000 1,725,000
- 2020 2,175,000 - -
==========================================================================================================
</TABLE>
In addition, research tax credits, not recorded in the accounts and
available to reduce future Federal income taxes payable, amount to
$258,000 and $654,000 and expire in 2009 and 2010, respectively.
In accordance with Statement of Financial Accounting Standards No. 109,
ACCOUNTING FOR INCOME TAXES, the income tax effect of temporary
differences that give rise to the net deferred tax assets is presented
below:
<TABLE>
<CAPTION>
=================================================================================================
June 30, June 30,
2000 1999
-------------------------------------------------------------------------------------------------
<S> <C> <C>
Scientific research and experimental development $ 3,064,730 $ 79,420
Non-capital losses 1,415,000 228,000
Excess of net book value of equipment over
the undepreciated capital cost (1,137,866) -
Investment tax credits 912,000 280,000
Less valuation allowance (4,253,864) (587,420)
-------------------------------------------------------------------------------------------------
$ - $ -
=================================================================================================
</TABLE>
F-21
<PAGE>
LUMENON INNOVATIVE LIGHTWAVE
TECHNOLOGY, INC.
(a Development Stage Enterprise)
Notes to Consolidated Financial Statements, Continued
Year ended June 30, 2000 and six-month period ended June 30, 1999 and periods
from inception (March 2, 1998) to December 31, 1998 and to June 30, 2000 (in
Canadian dollars)
================================================================================
9. Supplemental cash flow disclosure:
Non-cash investing and financing activities:
Acquisition of property and equipment through capital leases amounts to
$603,522 (US$408,171) at June 30, 2000 (1999 - nil).
Capital expenditures of $481,366 (US$325,555) are included in accounts
payable at June 30, 2000 (1999 - nil).
10. Financial instruments:
(a) Foreign currency risk management:
Options and warrants are exercisable in US dollars and payable in
such currency. Ultimate proceeds upon exercise of options and
warrants may vary due to fluctuations in the value of the Canadian
dollar relative to the US currency.
(b) Credit risk:
Financial instruments that potentially subject the Corporation to
significant concentrations of credit risk consist principally of
short-term investments and accounts receivable.
The Corporation has investment policies that require placement of
short-term investments in financial institutions evaluated as highly
creditworthy.
In the normal course of business, the Corporation evaluates the
financial condition of the parties with which it contracts on a
continuing basis and reviews the creditworthiness of all new
parties. The Corporation determines an allowance for doubtful
accounts to reflect specific risks.
F-22
<PAGE>
LUMENON INNOVATIVE LIGHTWAVE
TECHNOLOGY, INC.
(a Development Stage Enterprise)
Notes to Consolidated Financial Statements, Continued
Year ended June 30, 2000 and six-month period ended June 30, 1999 and periods
from inception (March 2, 1998) to December 31, 1998 and to June 30, 2000 (in
Canadian dollars)
================================================================================
10. Financial instruments (continued):
(c) Fair values:
The following table presents the carrying amounts and estimated fair
values of the Corporation's financial instruments at June 30, 2000
and 1999. The fair value of a financial instrument is the amount at
which the instrument could be exchanged in a current transaction
between willing parties. Fair value estimates are made as of a
specific point in time using available information about the
financial instrument. These estimates are subjective in nature and
often cannot be determined with precision.
<TABLE>
<CAPTION>
==========================================================================================================
June 30, June 30,
2000 1999
----------------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
amount value amount value
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash $ 1,125,382 $ 1,125,382 $ 1,722,871 $ 1,722,871
Term deposits 4,299,608 4,299,608 - -
Interest and sales tax receivable 365,934 365,934 237,539 237,539
Financial liabilities:
Accounts payable 1,047,082 1,047,082 523,550 523,550
Accrued liabilities 324,602 324,602 180,312 180,312
Convertible promissory note - - 298,720 298,720
==========================================================================================================
</TABLE>
The carrying amounts shown in the table are included in the
consolidated balance sheet under the indicated captions.
The following method and assumption were used to estimate the fair
value of each class of financial instruments:
The carrying amounts approximate fair value because of the short
maturity of these instruments.
F-23
<PAGE>
LUMENON INNOVATIVE LIGHTWAVE
TECHNOLOGY, INC.
(a Development Stage Enterprise)
Notes to Consolidated Financial Statements, Continued
Year ended June 30, 2000 and six-month period ended June 30, 1999 and periods
from inception (March 2, 1998) to December 31, 1998 and to June 30, 2000 (in
Canadian dollars)
================================================================================
11. Subsequent events:
(a) On July 21, 2000, the Corporation entered into a non-exclusive
license agreement with a third party. The Corporation is committed
to pay an initial license fee of $584,047 (US$395,000) and royalties
on sales of products as defined in the agreement.
(b) On July 25, 2000, the Corporation closed a financing involving the
issuance of $51,751,000 (US$35 million) five-year convertible notes
bearing interest at 7.5% per annum. Interest is payable upon the
earlier to occur of the repayment or conversion of the notes. The
notes are convertible into the Corporation's common stock at a
conversion price based on the closing bid price of the common stock
at the time of conversion with a floor as $10.35 (US$7) and a
ceiling of $36.96 (US$25) and a floor of $10.35 (US$7). The
investors also received five-year common stock purchase warrants
entitling them to acquire a total of 5,000,800 shares at a price to
be established in 18 months; the investors will have the right to
purchase shares of Lumenon at a maximum price of $44.36 (US$30) per
share if Lumenon's shares are then traded at a value exceeding
$103.50 (US$70). If the stock price is between $44.36 (US$30) and
$103.50 (US$70), the price will be the then traded value of the
shares minus $44.36 (US$30), divided by two, plus $14.78 (US$10). If
the stock price is under $44.36 (US$30), the price will be $14.78
(US$10).
F-24
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Securities and Exchange Commission Filing Fee.............$61,657.20
Accountants' fees and expenses............................$20,000.00
Legal fees and expenses..................................$120,000.00
Miscellaneous..............................................$3,342.80
--------
Total............................................$205,000.00
The foregoing costs and expenses will be paid by Lumenon. Other than the
Securities and Exchange Commission filing fee, all fees and expenses are
estimated.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
As permitted by law, our certificate of incorporation limits the
personal liability of a director for monetary damages for breach of fiduciary
duty of care as a director. Liability is not eliminated for:
o any breach of the director's duty of loyalty to us or our
stockholders;
o acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
o unlawful payment of dividends or stock purchases or redemptions;
or
o any transaction from which the director derived an improper
personal benefit.
Our certificate of incorporation and by-laws provide that we shall
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed proceeding by reason of the fact that he
is or was a director, officer, employee or an agent of Lumenon or is or was
serving at our request as a director, officer, employee or agent of another
entity, against all outlays incurred by him in connection with these
proceedings.
We propose to enter into indemnity agreements with our directors and
executive officers. The indemnity agreements will provide that we shall
indemnify them from and against liabilities and outlays in connection with any
threatened, pending or completed proceeding in which they are a party (other
than a proceeding by or in the right of Lumenon to procure a judgment in its
favor), unless it is determined that they did not act in good faith and for a
purpose which they reasonably believed to be in the best interests of Lumenon
and, in the case of a criminal proceeding or action, that they had reasonable
cause to believe that their conduct was unlawful. The indemnity agreements will
also provide that we shall indemnify them if they are a party to or threatened
to be made a party to any proceeding by or in the right of Lumenon to procure a
judgment in its favor, unless it is determined that they did not act in good
faith and for a purpose that they reasonably believed to be in, or, in the case
of service to an entity related to Lumenon, not opposed to, the best interests
of Lumenon, except that no indemnification for losses shall be made in respect
of (a) any claim, issue or matter as to which they shall have been adjudged to
be liable to us or (b) any threatened or pending action to which they are a
party or are threatened to be made a party that is settled or otherwise disposed
of, unless and only to the extent that any court in which this action or
proceeding was brought determines upon application that they are fairly and
reasonably entitled to indemnity for these expenses. This indemnification will
be in addition to any other rights to which these officers or directors may be
entitled under any law, charter provision, by-law, agreement, vote of
shareholders or otherwise.
We maintain a $5,000,000 directors and officers liability insurance
policy.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to our directors, officers and controlling persons pursuant
to the foregoing provisions, or otherwise, we have been advised that in the
opinion of the SEC this indemnification is against public policy as expressed in
II-1
<PAGE>
the Securities Act and is, therefore, unenforceable. In the event that a claim
for indemnification against these liabilities (other than the payment by us of
expenses incurred or paid by a director, officer or controlling person of us in
the successful defense of an action, suit or proceeding) is asserted by a
director, officer or controlling person in connection with the securities being
registered, we will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether this indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of the issue.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In July 1998, under a reorganization and acquisition plan, (i) Lumenon
acquired the outstanding stock of LILT in consideration of the issuance of
12,200,000 shares of common stock to the former shareholders of LILT and (ii)
Lumenon acquired the outstanding stock of Dequet Capital, Inc. in consideration
of the issuance of 4,000,000 shares of common stock to the former stockholders
of Dequet. The shares issued in connection with the acquisition of Lumenon were
issued to the six former shareholders of LILT, Najafi Holding, Inc., Andrewma
Holding, Inc., Touam Holding, Inc., SurfaceTech, Polyvalor and McGill University
in reliance upon the exemption provided in Section 4(2) of the Securities Act of
1933, as amended (the "Securities Act"), were deemed by us to be "restricted
securities" within the meaning of Rule 144 under the Securities Act and were
appropriately legended and restricted as to subsequent transfer. The shares
issued in connection with the acquisition of Dequet were issued to the former
stockholders of Dequet under the exemption provided in Rule 504 of Regulation D
under the Securities Act for a total consideration of US$540,000. No underwriter
was involved in either transaction.
During the six-month period ended June 30, 1999, Lumenon issued an
aggregate of 2,260,000 Units at a price of US$0.50 per unit to investors
(excluding Molex). Each Unit comprised one share of common stock and one warrant
for the purchase of one additional share of common stock at a price of US$0.90
per share. All of these warrants have been exercised. The securities were
offered and sold to the following entities and individuals under the exemption
provided in Section 4(2) of the Securities Act : Manitex Capital Inc., a
Canadian venture capital company, Pinetree Capital Corp., a Canadian venture
capital company, a group of Canadian investors investing through a confidential
trust, and a group of Canadian investors investing through Groome Capital.com,
Inc., an investment banking firm. Each investor was an accredited investor (as
defined in Rule 501 of Regulation D under the Securities Act ) or otherwise a
sophisticated investor or employed a purchaser's representative having knowledge
and experience in financial and business matters, each being capable of
evaluating the merits and risks of its investment and each having had the
opportunity to ask questions and receive answers concerning the terms and
conditions of the offering and to obtain additional information from Lumenon,
necessary to make an informed investment decision. All these securities were
deemed by us to be restricted securities and were appropriately legended and
restricted as to subsequent transfer. No underwriter was involved in this
transaction.
In March 1999, we issued US$200,000 principal amount of its 10%
Convertible Notes (the "Notes") to Brant Investments Limited Global Securities
Services, a Canadian entity and an accredited investor within the meaning of
Rule 501 of Regulation D under the Securities Act . Each US$1,000 principal
amount of the Notes was initially convertible into common stock at US$0.50 per
share. Upon conversion of the Notes, the holders received for each US$1,000
principal amount , warrants to purchase 1,000 additional shares of common stock
at US$0.90 per share with a term of 30 months. The securities were offered and
sold pursuant to the exemption provided in Section 4(2) of the Securities Act .
All of the Notes were deemed by us to be restricted securities and were
appropriately legended and restricted as to subsequent transfer. The warrants
were exercised in July 2000. Groome Capital.com, Inc. ("Groome") acted as
underwriter in connection with this placement. The notes were converted in
September 1999 in accordance with their terms.
In June 1999, we issued 1,500,000 shares of common stock, 1,666,667 cash
common stock purchase warrants and 5,800,000 service common stock purchase
warrants to Molex under the Molex Agreements, for a cash consideration of
US$750,000. Each cash common stock purchase warrant entitled Molex to acquire
one share of common stock at a price of US$0.90 on or before August 1, 2001 and
were exercised in November 1999. Each service common stock purchase warrant
entitles Molex to receive one share of common stock for services rendered under
the Molex Agreements and were exercised during fiscal year 2000. The securities
were offered and sold in reliance on the exemption provided in Section 4(2) of
the Securities Act and solely to an accredited investor, Molex, within the
meaning of Rule 501 of Regulation D under the Securities Act . No underwriter
was involved in this transaction.
II-2
<PAGE>
In July 1999, we issued 960,000 units at a price of US$1.00 per unit.
Each unit comprised one share of common stock and one warrant for the purchase
of one additional share of common stock at a price of US$1.50 per share before
June 2001. 200,000 of these warrants were exercised in May 2000. The securities
were offered and sold in reliance on the exemption provided in Section 4(2) of
the Securities Act and solely to accredited investors (as defined in Rule 501 of
Regulation D of the Securities Act ) or otherwise to sophisticated investors or
to investors employing a purchaser representative having knowledge and
experience in financial and business matters, each being capable of evaluating
the merits and risks of its investment and each having had the opportunity to
ask questions and receive answers concerning the terms and conditions of the
offering and to obtain additional information from Lumenon necessary to make and
informed investment decision. All securities were deemed by us to be restricted
securities and were appropriately legended and restricted as to subsequent
transfer. No underwriter was involved in this transaction.
In September 1999, we issued 407,000 additional units at a price of
US$4.00 per unit. Each unit comprised one share of common stock and one warrant
for the purchase of one additional share of common stock at a price of US$6.00
per share before September 2000. The securities were offered and sold in
reliance on the exemption provided in Section 4(2) of the Securities Act and
solely to accredited investors (as defined in Rule 501 of Regulation D of the
Securities Act ), or otherwise to sophisticated investors or to investors
employing a purchaser representative having knowledge and experience in
financial and business matters, each being capable of evaluating the merits and
risks of its investment and each having had the opportunity to ask questions and
receive answers concerning the terms and conditions of the offering and to
obtain additional information from us necessary to make and informed investment
decision. All these securities were deemed by us to be restricted securities and
were appropriately legended and restricted as to subsequent transfer. Groome
acted as underwriter in connection with this placement. 125,000 of the warrants
were exercised in October 1999.
In September 1999, we issued 400,000 additional units to holders of the
Notes, Brant Investments Limited Global Securities Services upon the full
conversion of its Notes. Each unit comprised one share of common stock and one
warrant for the purchase of one additional share of common stock at a price of
US$0.90 per share before September 30, 2001. The securities were offered and
sold solely to in reliance on the exemption provided in Section 4(2) of the
Securities Act and solely to accredited investors (as defined in Rule 501 of
Regulation D of the Securities Act ) or otherwise to sophisticated investors or
to investors employing a purchaser representative having knowledge and
experience in financial and business matters, each being capable of evaluating
the merits and risks of its investment and each having had the opportunity to
ask questions and receive answers concerning the terms and conditions of the
offering and to obtain additional information from us necessary to make an
informed investment decision. All these securities were deemed by us to be
restricted securities and were appropriately legended and restricted as to
subsequent transfer. Groome acted as underwriter in connection with the
placement of the Notes and their conversion, and upon conversion of these Notes,
Groome exercised its option to purchase an additional 30,000 units for US$15,000
and exercised the 30,000 warrants included in the Units for US$27,000 in
December 1999.
In November 1999, we issued 21,500 units at a price of US$7.00 per unit.
Each unit comprised one share of common stock and one warrant for the purchase
of one additional share at a price of US$9.00 per share before September 30,
2000. The securities were offered and sold solely in reliance on the exemption
provided in Section 4(2) of the Securities Act and solely to Ghaemi Holdings, a
Canadian holding company, and an accredited investor within the meaning of Rule
501 of Regulation D under the Securities Act . All these securities were deemed
by us to be restricted securities and were appropriately legended and restricted
as to subsequent transfer. Ghaemi Holdings exercised the 21,500 warrants for US
$193,500 in September 2000. No underwriter was involved in this transaction.
In November 1999, we issued 10,000 additional units at a price of
US$10.50 per unit. Each unit comprised one share of common stock and one warrant
for the purchase of one additional share at a price of US$15.50 per share before
October 31, 2000. The warrants expired unexercised. The securities were offered
and sold in reliance on the exemption provided in Section 4(2) of the Securities
Act and solely to Groupe Huot Inc., a Canadian holding company, and an
accredited investor within the meaning of Rule 501 of Regulation D under the
Securities Act . All these securities were deemed by us to be restricted
securities and were appropriately legended and restricted as to subsequent
transfer. No underwriter was involved in this transaction.
In November 1999, Molex exercised its warrants to acquire 1,666,667
shares at a price of US$0.90 per share for total proceeds of US$1,500,000. Molex
is an accredited investor within the meaning of Rule 501 of Regulation D under
the Securities Act and we relied upon the exemption provided in Section 4(2) of
the Securities Act. All these securities were deemed by us to be restricted
II-3
<PAGE>
securities and were appropriately legended and restricted as to subsequent
transfer. No underwriter was involved in these transactions.
Additionally, warrants to acquire a total of 755,000 shares were
exercised in the three-month period ended December 31, 1999 for total proceeds
of US$1,295,000. These warrants were issued in prior transactions described
above. All these securities were deemed by us to be restricted securities and
were appropriately legended and restricted as to subsequent transfer. No
underwriter was involved in these transactions
In December 1999, we entered into an agreement to issue 86,022
additional units at a price of US$23.25 per unit. Each unit comprised one share
of common stock and a warrant for the purchase of one half of an additional
share at a price of US$30.00 per share before December 7, 2000. The shares were
issued on January 12, 2000. The securities were offered and sold solely in
reliance on the exemption provided in Section 4(2) of the Securities Act and
solely to Terima a.v.v., a British Virgin Islands holding company, and an
accredited investor within the meaning of Rule 501 of Regulation D under the
Securities Act . All these securities were deemed by us to be restricted
securities and were appropriately legended and restricted as to subsequent
transfer. No underwriter was involved in this transaction.
In March 2000, we issued 1,500,000 shares of Common Stock to Molex for
cash consideration in the amount of US$750,000 as part of the scheduled second
closing under the terms of our Agreement with Molex . The securities were
offered and sold in reliance on the exemption provided in Section 4(2) of the
Securities Act and solely to an accredited investor, Molex, within the meaning
of Rule 501 of Regulation D under the Securities Act. No underwriter was
involved in this transaction. The proceeds were used to fund current activities
and expenses associated with the expansion project.
The following unregistered securities were issued by us from April 1,
2000 to October 31, 2000:
<TABLE>
<CAPTION>
Number of Shares
Issued/Subject Offering/
Date of Description of To Options or Exercise
Sale/Issuance Securities Issued Warrants & Notes Price Per Share
------------- ----------------- ---------------- ---------------
<S> <C> <C> <C>
March 2, 2000 Common stock issued to 709,848 US$26.38
Molex, an accredited
investor,
upon exercise of the
services
warrant
April 14, 2000 Common stock issued to 26,000 US$6.00
Groome Capital Corp.,
Inc., an
accredited investor, upon
exercise of warrants
May 8, 2000 Common stock issued to 150,000 US$0.90
Lavery, de Billy as nominee
for accredited investors,
upon
exercise of warrants
May 19, 2000 Warrants to purchase 200,000 US$0.90
shares of
common stock issued to
Lavery, de Billy as nominee
for accredited investors,
upon
exercise of warrants
June 23, 2000 Common stock issued to 5,090,152 US$26.38
Molex, an accredited
investor,
upon the exercise of the
services warrant
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
July 18, 2000 Common Stock issued to 210,000 US$0.90
Lavery, de Billy as
nominee
for Consultants
Alconsultex, an
accredited investor, upon
exercise of warrants
July 20, 2000 Common Stock issued to 50,000 US$0.90
Lavery, de Billy as nominee
for Jean-Louis Pulin, an
accredited investor, upon
exercise of warrants
July 20, 2000 Common Stock issued to 50,000 US$0.90
Lavery, de Billy as nominee
for 2973-9711 Quebec,
Inc., an
accredited investor, upon
exercise of warrants
July 24, 2000 Common stock issued to 500,000 US$0.90
Pinetree Capital Corp., a
accredited investor, upon
exercise of warrants
July 25, 2000 Warrants to purchase 10,000,800 to be
shares of determined
common stock and
convertible
notes into shares of common
stock issued to Capital
Ventures International and
Castle Creek Technology
Partners LLC
July 25, 2000 Common stock issued to 400,000 US$0.90
Brant
Investments Limited Global
Securities Services, an
accredited investor, upon
exercise of warrants
August 1, 2000 Common stock issued to 60,000 US$1.50
Lavery, de Billy as nominee
for accredited investor,
upon
exercise of warrants
August 1, 2000 Common Stock issued to 175,000 US$0.90
Lavery, de Billy as nominee
for Rush & Co., an
accredited
investor, upon exercise of
warrants
August 1, 2000 Common Stock issued to 39,750 US$0.90
Lavery, de Billy as nominee
for Jacques Paul-Hus, an
accredited investor, upon
exercise of warrants
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
August 1, 2000 Common Stock issued to 25,000 US$0.90
Lavery, de Billy as nominee
for Pierre Genest, an
accredited
investor, upon exercise of
warrants
August 11, 2000 Common Stock issued to 300,000 US$0.90
Lavery, de Billy as nominee
for Klug Investments, an
accredited investor, upon
exercise of warrants
August 25, 2000 Common Stock issued to 160,000 US$0.90
Lavery, de Billy as nominee
for Pierre L. Baribeau, an
accredited investor, upon
exercise of warrants
August 25, 2000 Common Stock issued to 50,000 US$0.90
Lavery, de Billy as nominee
for Diane Nadau, an
accredited
investor, upon exercise of
warrants
August 29, 2000 Common Stock issued to MDL 100,000 US$6.00
Investments Ltd., an
accredited
investor, upon exercise of
warrants
September 5, 2000 Common Stock issued to 26,000 US$6.00
Egger
& Co., an accredited
investor,
upon exercise of warrants
September 6, 2000 Common Stock issued to 40,700 US$6.00
National Bank Financial, an
accredited investor, upon
exercise of warrants
September 6, 2000 Common Stock issued to NBC 26,000 US$6.00
Clearing Services Inc., an
accredited investor, upon
exercise of warrants
September 6, 2000 Common Stock issued to NBC 26,000 US$6.00
Clearing Services Inc., an
accredited investor, upon
exercise of warrants
September 6, 2000 Common Stock issued to 26,000 US$6.00
First
Marathon, an accredited
investor, upon exercise of
warrants
September 6, 2000 Common Stock issued to NBC 26,000 US$6.00
Clearing Services Inc., an
accredited investor, upon
exercise of warrants
II-6
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
September 7, 2000 Common Stock issued to 26,000 US$6.00
Sassoon Shahmoun, an
accredited investor, upon
exercise of warrants
September 20, 2000 Common stock issued to 21,500 US$9.00
accredited investors upon
exercise of warrants
October 16, 2000 Common stock issued to 616,414 US$11.55
accredited investors upon
conversion of notes
</TABLE>
The issuances of all of the securities listed in this Item 15 were
exempt from registration pursuant to Section 4(2) of the Securities Act as
transactions not involving a public offering. All of the securities listed in
this Item 15 were deemed by us to be restricted securities and were
appropriately legended and restricted as to subsequent transfer. No underwriter
was involved in these transactions. For each of the issuances listed in this
Item 15, there were no solicitations or advertising by Lumenon, and investors
completed an investor questionnaire as to their qualifications and level of
experience.
II-7
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
2.1 Amended Plan of Reorganization, Merger and Acquisition by which
WWV Development, Inc. (a Delaware corporation) acquired and
merged into itself Lumenon Innovative Lightwave Technology, Inc.
(a Canadian federal corporation), and acquired Dequet Capital,
Inc. (a Nevada corporation) as wholly-owned subsidiaries, dated
July 7, 1998 (incorporated by reference to Exhibit 2.1 to our
Registration Statement on Form 10).
3.1 Amended and Restated Certificate of Incorporation of Lumenon
Innovative Lightwave Technology, Inc. (incorporated by reference
to Exhibit 3.1 to our Registration Statement on Form 10).
3.2 Amended and Restated By-Laws (incorporated by reference to
Exhibit 3.1 to our Registration Statement on Form 10).
4.1 Specimen Certificate for Shares of Common Stock (incorporated by
reference to Exhibit 4.1 to our Registration Statement on Form
10).
4.2 Lumenon Innovative Lightwave Technology, Inc. Stock Option
Incentive Plan (incorporated by reference to Exhibit 4.2 to our
Registration Statement on Form 10).
4.3 Form of Lumenon Innovative Lightwave Technology, Inc. Warrant to
Acquire Shares of Common Voting Stock (incorporated by reference
to Exhibit 4.3 to our Registration Statement on Form 10).
4.4 Form of Convertible Note dated, July 25, 2000 (incorporated by
reference to Exhibit 4.1 to our Current Report on Form 8-K, filed
July 28, 2000).
4.5 Form of Stock Purchase Warrant, dated July 25, 2000 (incorporated
by reference to Exhibit 4.2 to our Current Report on Form 8-K,
filed July 28, 2000).
*5 Opinion of Olshan Grundman Frome Rosenzweig & Wolosky LLP.
10.1 License Agreement by and between Polyvalor and McGill University
and Lumenon Innovative Lightwave Technology, Inc. (incorporated
by reference to our Registration Statement on Form 10, Exhibit
10.1).
10.2 Teaming Agreement between Molex Incorporated and its subsidiary
Molex Fiber Optics, Inc., and Lumenon Innovative Lightwave
Technology, Inc. and its wholly owned subsidiary LILT Canada
Inc., dated May 19, 1999 (incorporated by reference to Exhibit
10.2 to our Registration Statement on Form 10).
10.3 Stock Purchase Agreement between Molex Incorporated, Lumenon
Innovative Lightwave Technology, Inc., and LILT Canada, Inc.,
dated May 19, 1999 (incorporated by reference to Exhibit 10.3 to
our Registration Statement on Form 10).
10.4 Stock Restriction Agreement between Molex Incorporated, Lumenon
Innovative Lightwave Technology, Inc., and LILT Canada, Inc.,
Andrewma Holding, Inc., and Najafi Holding Inc., dated June 21,
1999 (incorporated by reference to Exhibit 10.4 to our
Registration Statement on Form 10).
10.5 Registration Rights Agreement between Lumenon Innovative
Lightwave Technology, Inc. and Molex Incorporated dated June 21,
1999 (incorporated by reference to Exhibit 10.5 to our
Registration Statement on Form 10).
II-8
<PAGE>
10.6 Securities Purchase Agreement by and among Lumenon Innovative
Lightwave Technology, Inc., Capital Ventures International and
Castle Creek Partners LLC, dated July 25, 2000 (incorporated by
reference to Exhibit 10.8 to our Current Report on Form 8-K,
filed July 28, 2000).
10.7 Registration Rights Agreement by and among Lumenon Innovative
Lightwave Technology, Inc., Capital Ventures International and
Castle Creek Partners LLC, dated July 25, 2000 (incorporated by
reference Exhibit 10.2 to our Current Report on Form 8-K filed on
July 28, 2000).
10.8 Agreement of Lease between Liberty Sites Ltd. and LILT Canada,
Inc., dated May 19, 2000 (incorporated by reference to Exhibit
10.8 to our Annual Report on Form 10-K for the fiscal year ended
June 30, 2000).
10.9 License Agreement between Polaroid Corporation and LILT Canada,
Inc., a subsidiary of Lumenon Innovative Lightwave Technology,
Inc., dated July 21, 2000 (incorporated by reference Exhibit 10.9
to our Current Report on Form 8-K filed on July 28, 2000).
21 Subsidiaries of the Registrant (incorporated by reference to
Exhibit 21 to our Registration Statement on Form 10).
*23.1 Consent of KPMG, LLP.
23.2 Consent of Olshan Grundman Frome Rosenzweig & Wolosky LLP
(included on Exhibit 5 to this Registration Statement).
24 Power of Attorney (included on signature page to this
Registration Statement).
27 Financial Data Schedule (incorporated by reference to Exhibit 27
to our Annual Report on From 10-K for the fiscal year ended June
30, 2000).
-------------------
* Filed herewith.
II-9
<PAGE>
ITEM 17. UNDERTAKINGS
(a) The undersigned Registrant undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section
10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the
Registration Statement (or the most recent
post-effective amendment thereof) which,
individually or in the aggregate, represent a
fundamental change in the information set forth in
the Registration Statement;
(iii) To include any material information with respect to
the plan of distribution not previously disclosed
in the Registration Statement or any material
change to such information in the Registration
Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall
be deemed to be a new Registration Statement relating to the
securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering.
(h) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against
public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against liabilities (other
than the payment by the Registrant of expenses incurred or paid by a
director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by
such a director, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the opinion
of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether
indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.
II-10
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-1 and has duly caused this Amendment
No. 1 to the Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Montreal, Canada, on the 9th day of
November, 2000.
LUMENON INNOVATIVE LIGHTWAVE TECHNOLOGY,
INC.
By: *
---------------------------------------------
S. Iraj Najafi,
President and Chief Executive Officer
---------------------------------------------
Date
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints S. Iraj Najafi, Mark P. Andrews and
Vincent Belanger his true and lawful attorney-in-fact and agent, with full power
of substitution and resubstitution for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments to this Registration
Statement, including post-effective amendments to this Registration Statement,
and any related registration statement filed pursuant to Rule 462(b) of the Act
and to file the same, with exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorney-in-fact and agent full power and authority to do and perform each and
every act and thing requisite and necessary to be done, as fully to all intents
and purposes as he might or could do in person, ratifying and confirming all
that said attorney-in-fact and agent or either of them, or their or his
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons on behalf
of the registrant and in the capacities and on the dates indicated.
*
---------------------------------- ------------------------------
S. Iraj Najafi Date
President, Chief Executive Officer
and Director (Principal Executive Officer)
*
--------------------------------- ------------------------------
Mark P. Andrews Date
Vice President, Chief Technical Officer,
Secretary and Director
*
--------------------------------- ------------------------------
Anthony Moretti Date
Director
*
--------------------------------- ------------------------------
Denis N. Beaudry Date
Director
<PAGE>
--------------------------------- -------------------------------
Pierre-Paul Allard Date
Director
/s/ Vincent Belanger November 9, 2000
--------------------------------- -------------------------------
Vincent Belanger Date
Vice President Finance and Chief Financial Officer
(Principal Financial and Accounting Officer)
*
--------------------------------- -------------------------------
Guy Brunet Date
Director
*
--------------------------------- -------------------------------
Gilles Marcotte Date
Director
*
--------------------------------- -------------------------------
Pierre-Andre Roy Date
Director
* By: /s/ Vincent Belanger
------------------------------
Vincent Belanger
Attorney-in-fact
